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May 2017
Office decentralisation - a reality check for Singapore
2
Singapore has been pushing for decentralisation since 1991 with the objectives of bringing work closer to home, alleviating congestion and relieving pressure on the supporting infrastructure of the Central Business District (CBD).
And now, 25 years on, how successful have these efforts been? This paper seeks to evaluate the progress of Singapore’s decentralisation efforts and recommend improvements.
Introduction
Source: JLL Research, GIS
Figure 1 Density of office stock per land area (sq ft)
Tokyo Hong Kong Singapore
Least dense (0.1 million) Densest (1.0 million)
Office decentralisation - a reality check for Singapore 3
Chapter 1 The decentralisation trend
The financial centres in the Asia Pacific region – Singapore, Hong Kong and Tokyo – are densely populated cities, with very high ratios of Grade A office stock to land areas in their CBD. These CBDs are highly urbanised and traditionally attract corporate occupiers as they are the main centres of business with good access and prestigious addresses.
However, a shift from this traditional business model towards the decentralisation of office functions is developing, as identified in JLL’s Offices 2020 report series.
From the business perspective, as real estate located outside the CBD is typically less expensive, the long-term savings from lower rents in the decentralised area are especially significant for tenants that have substantial operations located in the CBD. For this reason, many occupiers are willing to relocate back/mid-office functions to decentralised areas while keeping their front offices in the CBD.
From a city planning perspective, decentralisation can help ease the pressure on the supporting infrastructure leading to and surrounding the CBD. This may translate to better transport efficiency (and, possibly, worker productivity) and avoid the massive traffic jams that occur in many Asian cities today.
Source: ArcGIS, URA and JLL Research
1 The Concept Plan is a strategic land use and transport plan that guides Singapore’s development over the next 40-50 years. It is reviewed every ten years. 2 These include the Urban Redevelopment Authority, the Housing and Development Board and the JTC Corporation.
Figure 2 Commercial clusters in Singapore by 2030
Woodlands
Changi Air Hub
Buona Vista
Alexandra
Jurong Lake DistrictToa Payoh
Novena
Serangoon
Kallang RiversideCentral Area
Bishan Tampines
Paya Lebar Central
Expo
Marina Parade
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Chapter 2 Singapore’s decentralisation efforts
Singapore has long recognised the benefits of the decentralisation of office space. As far back as the 1991 Concept Plan1, the Urban Redevelopment Authority (URA) – Singapore’s national planning agency, proposed the development of regional, sub-regional and fringe commercial nodes outside the CBD. To be well-connected to the city centre by expressways and public transport networks, these were envisaged to bring work closer to home and to alleviate congestion in the city-centre.
The key planning objectives set out in the Concept Plans were to be achieved largely via public land sales initiative such as the Government Land Sales (GLS) programme by which land sites in designated growth areas are released by the state agencies2 for development by the private sector. This mechanism has proven successful in the development of the Tampines Regional Centre where some eight land
parcels for office development were sold by public bidding between 1994 and 1997. These have since been developed into projects such as AIA Tampines, OCBC Tampines Centre and Abacus Plaza.
The URA continually updates its plans and the latest set of commercial clusters to be developed by 2030 is shown in Figure 2.
In recent years, the government’s focus has been on the development of decentralised commercial centres in the Jurong Lake District, Paya Lebar Central and the upcoming area of Woodlands. Since 2010, some five land parcels for office development in these locations have been sold by public bidding. Completed projects include JEM Office Tower, Westgate Office Tower and Paya Lebar Square, while those under construction include Paya Lebar Quarter and Woods Square.
Office decentralisation - a reality check for Singapore 5
Chapter 3 How have we fared so far?
The Metropolis in Buona Vista achieved remarkable commitment level of about 90% upon project completion in 2013. Major occupiers include Procter & Gamble, SGX and Shell.
1. Corporate occupiers have been receptive As of end-2016, the vacancy rate of prime decentralised office space stood at a low of 1.6%, underscoring the healthy demand for decentralised office space. Other evidence attesting to corporate occupiers’ willingness to relocate (either partially or wholly) to decentralised locations is the remarkable commitment level of about 90% achieved by The Metropolis upon its completion in 4Q13, notwithstanding its untested location in Buona Vista (western part of Singapore).
Corporate occupiers have been receptive
1Insufficient rental
gap to motivate decentralisation
3Stagnant prime
stock limits decentralisation
potential
2
Source: JLL Research
Table 1 Major en-bloc prime office completions arising from public land sales initiative (2007-2016)
Name of development Estimated net lettable area (sq ft)CBD Asia Square Tower 1 and 2 2,040,000
South Beach Tower 520,000
Marina Bay Financial Centre Towers 1, 2 and 3 2,930,000
Guoco Tower 880,000
Decentralised The Metropolis 1,050,000
Note: New en bloc office supply in terms of net lettable area (sq ft) generated from public land sales initiative between 2007 and 2016Source: HDB, URA, JLL Research
Figure 3 New prime en bloc office supply resulting from public land sales initiative
CBDDecentralised
78%
22%
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2. Stagnant prime stock limits decentralisation potentialThe lack of Grade A decentralised office stock is limiting Singapore’s decentralisation potential.
In spite of the Government’s drive for decentralisation, it is alarming to note that the stock of Grade A office space outside the CBD has stagnated at approximately 2 million sq ft since 2007 and accounted for a meagre 10% of Singapore’s total CBD Grade A office stock as of end-2016.
This phenomenon can be attributed partly to the lower land supply released via the GLS programme for office development in the decentralised areas over the last ten years. In fact, the decentralised land supply has been so limited that any projects built on it could barely replace the older and obsolete stock, much of which has been demolished or downgraded from Grade A status.
In contrast, the CBD saw many more land sites released for office development in the last ten years. In fact, the new CBD office supply between 2007 and 2016 arising from the GLS programme almost quadrupled that of the decentralised region. In addition, the continued rejuvenation of some older CBD stock such as Ocean Financial Centre and OUE Bayfront, contributed to the large increase of 104% in CBD Grade A office stock between 2007 and 2016.
Source: JLL Research
Figure 4 Comparison of decentralised and CBD Grade A stock and rent
Legend:
Decentralised Grade A
2007 2016
CBD Grade A
$ $56% $ $34%The rental gap has narrowed as the ratio of
decentralised to CBD stock decreased over the years.
Office decentralisation - a reality check for Singapore 7
3. Insufficient rental gap to motivate decentralisationConsequently, the slower rate of growth in decentralised prime office stock compared to that for the CBD has tightened the rental gap between these two sub-markets. The limited supply of Grade A decentralised office space has kept the vacancy rate low at 1.6% as of end-2016 and prime decentralised office rents have remained resilient.
As the ratio of decentralised stock to CBD stock tightened from 1:5 in 2007 to only 1:10 by 2016, the rental gap between decentralised and CBD sub-markets narrowed from 56% in 2007 to 34% in 2016.
Such a narrow rental gap provides little incentive for occupiers to forgo the convenience and prestige of a CBD location and opt for decentralised space. This is further compounded by the abundance of modern and prestigious office developments with high and efficient specifications that draw occupiers into the CBD and away from the decentralised locations.
Source: JLL Research
Figure 5 Comparison of Grade A office stock
2007 2016
Singapore Hong Kong
2007 2016
Decentralised Grade A (million sq �) CBD Grade A (million sq �)
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The office market in Hong Kong is remarkably different from that of Singapore.
In Hong Kong, both the private and public sectors drive office supply, with developers building more office developments outside the CBD because of the lack of land in the CBD.
Chapter 4 Hong Kong, Sydney and Shanghai’s experience
The amount of decentralised stock available to support this
demand kept decentralised rents at a discount of about 67%
(as of end-2016) to CBD rents.
“ ”
Source: JLL Research
Sydney Shanghai
Driving force Initially the government relocated public sector jobs out of the CBD to suburbs such as Parramatta in the 1980s and early 1990s to encourage decentralisation of offices. Over time, large finance and professional services institutions established satellite offices in those areas in order to service their clients located there.
The government is driving decentralisation by improving transport infrastructure and encouraging reputable landlords to develop the offices. Most decentralised office buildings are built above the metro stations.
Current Status The market has now grown organically where more companies (ranging from financial institutions and business services) had set up offices and taken up additional space to serve the suburbs in western Sydney. The government has also announced more public sector jobs to be decentralised from the Sydney CBD to Parramatta over the next five years – which will spur further office development in the market.
The decentralised office buildings are popular with tenants who are looking to consolidate from multiple buildings to a single location and those that are looking for expansion space.
Rental gap between CBD and decentralised Grade A buildings (as of end-2016)
54.9% 38.5%
Table 2 A snapshot of Sydney and Shanghai’s decentralisation efforts
Office decentralisation - a reality check for Singapore 9
The lack of new developments and rejuvenation of existing buildings in the CBD resulted in a large disparity in the quality of CBD office stock compared to decentralised office stock. Further, the influx of Chinese firms during 2013-16 period forced CBD rents skywards, increasing 16.5% between 2007 and 2016. The lack of new CBD office stock and high rents resulted in a substantial number of occupiers moving into decentralised office buildings.
The amount of decentralised stock available to support this demand kept decentralised rents at a discount of about 67% (as of end-2016) to CBD rents.
We have also compared office decentralisation efforts in two other cities, namely Sydney in Australia and Shanghai in China. The decentralised office market in Sydney, particularly Parramatta, is reaching maturation compared to Shanghai’s office market, which is fairly young at less than ten years of age. Table 2 provides a quick comparison between the two cities.
Source: JLL Research
Figure 6 Grade A office stock and rents, Singapore versus Hong Kong
2007 2016Singapore
Rents (SGD psf pm)Stock (mil sq ft)
Hong Kong2007 2016
Rents (HKD psf pm)Stock (mil sq ft)
0
20
40
60
80
100
120
0
10
20
30
40
50
CBD stockDecentralised stock
CBD Net Effective RentsDecentralised Net Effective Rents
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
0
5
10
15
20
25
10
Increase decentralised supply to keep rents attractiveDrawing comparisons between Hong Kong and Singapore, the availability of Grade A office stock (or the lack thereof) in decentralised locations in relation to the CBD has affected the behaviour of tenants and the movement of rents.
In Singapore, the limited rental gap of 34% as of end-2016 between prime CBD and decentralised office rents is making it less convincing for tenants to relocate to decentralised office buildings.
Chapter 5 Recommendations on how to drive successful decentralisation
Moreover, the supply of quality office space in decentralised locations is tight with a vacancy rate at a low 1.6% as of end-2016. If this limited supply situation in decentralised areas continues, the rental gap between these two sub-markets could tighten further, discouraging relocation and dampening Singapore’s decentralisation efforts.
As Singapore seeks to be cost-competitive, there is a need to increase the supply of decentralised office space to provide businesses more alternative locations that best suit their needs. This will promote diversity in office space and support the growth of business entities.
The increase in the supply of decentralised office space, while moderating the supply in the CBD concurrently, could help widen the rental gap. We are of the view that a rental gap in excess of 60% could provide sufficient rent cost-savings to motivate businesses to consider decentralised office locations.
Aside from the potential cost savings, some intangible aspects of the newer decentralised office buildings could also draw tenants into decentralised areas. These intangible aspects include the provision of better space efficiency, such as column-free space and the availability of knock-out panels that enable installation of internal staircases and would better cater to the requirements of occupiers. Further, newer buildings tend to offer green credentials that might strengthen the brand image of tenants.
We are of the view that a rental gap in excess of 60% could provide sufficient rent
cost-savings to motivate businesses to consider
decentralised office locations.
“ ”
Westgate
12
Adopting the mixed-use development formatTraditionally, office buildings in Singapore have been predominantly single-use and most of them are located in older areas of the CBD, such as Shenton Way and Raffles Place.
This is unlike Tokyo and Hong Kong, where mixed-use developments are common as a means for landlords to diversify revenue streams on a micro level and maximise space efficiency on a land-use planning basis. Anecdotally, some mixed-use developments in Tokyo are considered prime space as it commands an average rent premium of 5% over single-office developments. The lower rents in single-use developments in Tokyo could arise from the need to compensate for the lack of amenities compared to a mixed-use development.
Recognising the benefits of mixed-use development, the URA has placed focus on increasing the number of such projects that have a high component of office space in Singapore in recent years. This requirement was reflected in the tender process of recent land sales in the URA’s GLS programme, providing more efficient use of available land.
These mixed-use developments usually provide retail space that caters to the needs of the typical office worker and also serves as a shopping destination. The availability of such developments, which congregate different real estate
uses in a single building, has so far been successful in Singapore. For example, the vibrancy generated by modern mixed-use developments in the decentralised areas, such as JEM and Westgate (west of Singapore) and the upcoming Paya Lebar Quarter (east of Singapore), has garnered interest from potential occupiers. As of the time of writing, the office components in both JEM and Westgate had near full occupancy.
We therefore propose that the efforts to decentralise office space be intensified in tandem with increasing the prevalence of mixed-use developments that have a high office component. This will provide a winning formula for encouraging corporate occupiers to relocate from the CBD. In addition, from the town planning point of view, the availability of mixed-use developments would lower the propensity to develop a large number of supporting amenities in the nearby vicinity. This direction of land use would allow efficient allocation of land resources – a precious commodity in Singapore.
We therefore propose that the efforts to decentralise office
space be intensified in tandem with increasing the prevalence
of mixed-use developments that have a high office component.
“ ”
JEM
Office decentralisation - a reality check for Singapore 13
Singapore embarked on office decentralisation from as early as the 1990’s but progress so far has been slow.
The stock of quality decentralised office space has stagnated at approximately 2 million sq ft since 2007, accounting for a meagre 10% of total CBD Grade A stock in Singapore as of end-2016. The lack of good quality decentralised office stock has put a damper on Singapore’s efforts to decentralise.
Additionally, the rental gap of 34% (end-2016) between CBD and decentralised Grade A office rents is insufficient to motivate businesses to relocate. While the nature of occupiers’ businesses and proximity to their clients play an important role in corporate occupiers’ decision to relocate from the CBD, cost savings arising from lower rents could also provide reason for corporate occupiers to move their operations (or part of them) out of CBD. We believe a rental gap in excess of 60% is necessary to yield sufficient rental savings to entice corporate occupiers to relocate.
To achieve this rental gap, it will be necessary to increase the supply of decentralised office space while moderating office supply in the CBD. To this end, we recommend that the government consider increasing the supply of land in the decentralised area for mixed-use development with a high office content.
Besides adding vibrancy to the area, a mixed-use development format is recommended as the retail, F&B and entertainment tenants provide convenience to the office workers. Moreover, the availability of mixed-use developments would lower the propensity to develop a large number of supporting amenities in the nearby vicinity, thereby allowing efficient allocation of land resources.
Chapter 6 Conclusion
Recommendations at a glance
Widen rental gap between prime CBD and decentralised office to in excess of 60%
Increase decentralised office supply, moderate CBD office supply
Adopt mixed-use development format
Tay Huey Ying Jenny GohHead of Research & Consultancy JLL Singapore
Senior Research Analyst JLL Singapore
14
Authors
jll.com.sg
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