Location can continue to drive price premium for CBD offices, prime area homes

Even as the suburbs improve, the CBD and districts 9, 10, 11 should continue to enjoy price premiums for offices and homes respectively.  PHOTO: BT FILE

Updated from : The Business Times, 26 Sep 2022

SINGAPORE’S suburbs have transformed over recent years. Places such as Jurong and Tampines have become high-quality live, work and play destinations.

Will the pricing premium enjoyed by the traditional prime areas such as the Central Business District (CBD) for offices and districts 9, 10 and 11 for homes erode and possibly even disappear?

In the office market, great work spaces that are conducive to co-creating ideas can be developed in the suburbs. For example, expect high-quality work spaces to come up at Punggol Digital District, which will progressively open from 2024.

Today, many workers in the suburbs enjoy good transport connectivity and easy access to a myriad of fitness facilities, coffee joints, food outlets, watering holes and leisure facilities. Is it worth paying double in rent for quality office space in the CBD versus the suburbs?

Coming out of the Covid-19 pandemic, businesses may move from operating out of one central location in the CBD to splitting operations into multiple locations, including the suburbs.

CBD’s draw

Nonetheless, amid more workers returning to offices, CBD Grade A office buildings are thriving. According to Colliers, core CBD premium and Grade A office rents rose 6.1 per cent from a year ago to S$11.10 per square foot per month (psf pm) in Q2 2022, while city-fringe and suburban office rents rose 1 per cent each to S$6.64 psf pm and S$4.53 psf pm, respectively.

Perhaps the CBD’s pull remains strong for businesses. Bringing work places close to where people live via decentralisation makes sense as workers save on commute time, which helps the environment. Still, when choosing a company’s core work space, the CBD can emerge tops. Businesses fighting for talent will find the CBD a convenient location for people who live all over the island.

When a critical mass of businesses choose the CBD, others will follow. By working out of offices, which are close to each other, workers can build deeper connections with business partners over in-person interactions. The benefits of such a clustering effect will likely remain intact in a Covid-endemic world.

Moreover, the CBD is undergoing change that will boost its draw as a premier destination. Older buildings are being redeveloped, and new integrated developments are being built. As more homes get built in the CBD, more knowledge workers may live near their office; retail and food and beverage outlets in the CBD can enjoy better business.

Prime residential lags

But while prime CBD office buildings are thriving, the price rise of non-landed private homes in prime areas is lagging from that elsewhere. And the recent buzz with new private home launches has been generated by suburban developments such as Lentor Modern and AMO Residence chalking up strong sales.

Prices of private non-landed homes in the Rest of Central Region (RCR) or city fringe and the Outside Central Region (OCR) or suburbs rose by 44.5 per cent and 65.8 per cent respectively between Q1 2010 and Q2 2022, according to data by the Urban Redevelopment Authority. Over the same period, prices in the Core Central Region (CCR), which covers districts 9, 10 and 11 as well as downtown and Sentosa, rose by 15.4 per cent.

Between Q1 2020 and Q2 2022, prices of non-landed private homes in CCR, RCR and OCR rose by 7.7 per cent, 26.7 per cent and 17.6 per cent respectively.

Perhaps non-landed homes in CCR will continue to underperform. Buyers may be happy to save money by buying a new condominium unit in OCR for S$2,000 psf versus paying say S$3,000 psf or around 50 per cent more for a new unit in district 10, especially as new suburban condominiums are being built that offer good design, comprehensive facilities and high-end fittings.

The property cooling measures of late 2021 may hurt CCR more than OCR. Typically, foreigners account for a larger share of transactions in CCR than OCR. With the cooling measures, foreigners buying any home here pay 30 per cent Additional Buyer’s Stamp Duty (ABSD), up from 20 per cent, while Singapore citizens buying their first home pay zero ABSD.

More expensive private homes, which are concentrated in the prime areas, will bear the brunt of higher property tax that will rise in 2 stages in 2023 and 2024. The property tax rate for non-owner-occupied homes will reach 12-36 per cent from Jan 1, 2024, up from 10-20 per cent presently. The property tax for owner-occupied homes will go up for the portion of annual value in excess of S$30,000 to reach 6-32 per cent from 2024, up from 4-16 per cent today.

Nonetheless, while the living environment in the suburbs is improving, prime areas have unique selling points. Residents in the Tanglin area can easily access the Dempsey Hill lifestyle enclave and the Singapore Botanic Gardens, which is a Unesco World Heritage site.

Residents in the Bukit Timah area enjoy a low-density neighbourhood that has many landed homes, and easy access to numerous highly sought-after schools. Living in the River Valley area offers easy access to the Singapore River, and convenient commuting to the Orchard Road shopping belt and the CBD.

Singapore has a small land mass, and ever improving transport connectivity makes many parts of the island easily accessible. Still, space users are likely to ascribe pricing differences because of location.

With an ABSD framework that discourages buying of multiple homes, some residents may opt to buy 1 home in a prime location instead of multiple homes in various locations. Amid geopolitical tensions, buying of homes by foreigners is picking up, with the majority of new private home purchases by foreigners being in CCR in August.

Looking ahead, the CBD should continue to command top rental rates and capital value in the office market, while districts 9, 10 and 11 will likely still be price leaders in the homes market.

Investors seeking to deploy funds in safe haven Singapore will need to figure out whether the clamour for good grade office space leads to a wider gap in rental rate between the CBD and the suburbs, or whether non-landed home prices in the prime areas can reverse recent relative underperformance.