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CapitaLand Commercial Trust Describes a Tough Office Rental Market In 2 Key Slides

CapitaLand Commercial Trust (SGX: C61U) put up a commendable performance in 2016.

But it doesn’t mean that the real estate investment trust (REIT) had it easy. In fact, 2016 was a tough year for the Singapore office rental market. As a brief background, CapitaLand Commercial Trust has stakes in 10 prime commercial properties in Singapore.

In the REIT’s 2016 fourth quarter earnings briefing, there were two slides that captured the difficult operating environment.

Office supply

Lynette Leong, the chief executive officer of CapitaLand Commercial Trust’s manager, said:

“So here’s the — again an update on the Singapore office market. As you can see, well 2017’s new supply is already very well-known and after that, the new supply actually drops precipitously in the ensuing years. On the average, the gross new supply is about one million square feet — actually it’s under one million square feet for the next four years.”

A summary of the office supply situation is shown below:

2017-04-124 CapitaLand Commercial Trust Office Supply
Source: CapitaLand Commercial Trust earnings presentation

As Leong noted, the average office supply between 2017 and 2020 averages at around one million square feet per year. This figure is not too far away from the long-term average annual net supply of 0.8 million square feet per year recorded between 2006 and 2015.

However, the new supply is bunched up around 2017 at the moment, and might have led to pressure on rental rates for offices in Singapore.

Pressure on rental rates

According to CBRE, the Grade A office market rent in Singapore has been on a downtrend starting from the second quarter of 2015. This is captured in the slide below:

2017-04-14 CapitaLand Commercial Trust Rental Rates
Source: CapitaLand Commercial Trust earnings presentation

Referring to the slide above, Leong said:

“So Grade A market rents, we use these — we use the data by CBRE. You can see that there has been a 20% decline since the first quarter of 2015, and in the last quarter it’s declined further, by 2.2%, to SGD9.10. So we have — we are actually below the previous trough of SGD9.55 already.”

Leong makes a couple of points here. Firstly, there has been a sizable 20% decline in Grade A rental rates in the fourth quarter of 2016 compared to the first quarter of 2015. Furthermore, the rate has now declined to S$9.10 per square foot per month. Leong notes that this level is lower than the previous trough of S$9.55 per square foot per month recorded in 2013.

Rental rates have been as low as S$4.48 per per square foot per month in the aftermath of the SARS crisis and post-dotcom-bubble crash in 2003. During the global financial crisis, rates also fell to a low of S$8 per square foot per month.

With that, let’s see what 2017 will bring for CapitaLand Commercial Trust.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.