The Singapore office market is highly volatile. In 2001-2004, prime office rents fell 42%, before rising 270% in 2005-2007 and then correcting downwards by 52% in 2008-2009. In the last two years, prime office rents fell 18% and JLL expects rents to fall another 10% before recovering in 2017.

Due to the cyclicality, investment in Singapore office assets at the right time can provide rich returns We looked at data from 2000 to find the best years to buy an office building in Singapore and hold for five years. We found that these periods have generally coincided with periods of high vacancy rates. In 2002-2005, an investor who bought an office building and sold it after five years would have made an average annual return of 18%. In 2009 to 1H2010, an investor doing the same would make an average annual return of 11%. The reason could be because asset pricing becomes more reasonable in periods of high vacancies and pessimism, allowing investors to make good purchases.

Chart 1: Average annual return from investing in a Singapore office asset
for 5 years by year of purchase

Source: JLL

Based on current supply pipeline, JLL expects the CBD office vacancy rate to rise to 12.5% in 2017 and stay at around 12.1% in 2018, potentially presenting an opportune time to invest in office assets.

Another way to time the market is based on market yield spreads. Counter-intuitively, it has historically been better to buy assets when market yield spreads are narrower, as these coincide with periods of high vacancies and rental declines.

In 2002-2004, when vacancy rates were high and rents have fallen, the spread between prime office yields and 10-year bond yield ranged from 124bps to 199 bps. In 2009-1H2010, this spread was around 185bps. Outside of these periods, yield spreads have generally been wider at 200-300bps.

While the current yield spread of 150-190bps seem tight, this is largely due to the 18% decline in office rents over the last 2 years. When occupancy and rents recover over the next five years, it is likely that capital values would follow the same trend.

Chart 2: Prime office caprate, 10Y SGD bond yield and rental growth
Source: JLL

Structurally, we are also positive about Singapore’s office market outlook. Singapore is situated in the fast-growing South East Asia region. SEA economies are forecast to grow at 5% annually until 2020, exceeding global growth of 3.5%. The strongest growth countries are potentially Vietnam, Philippines and Indonesia. Their growth will support Singapore’s exportable services and enhance the city’s value proposition as a gateway of SEA.

Between 2010 and 2014, Singapore’s services exports recorded robust growth of 8.6% CAGR. Despite the global slow down in trade in 2015, export growth in Singapore’s financial services, telecommunications, computer and information services sectors stayed resilient. In 2016-2020, we expect these exportable services to continue to grow given the rise of the middle class and increased urbanisation in SEA.

Chart 3: Singapore services growth and the ASEAN economy
Source: Dept of statistics, JLL estimates

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