An examination of the structure and dynamics of Singapore's maturing Central Area office market
| Date | 29 July 2014 |
| Pages | 485-504 |
| DOI | https://doi.org/10.1108/JPIF-02-2014-0013 |
| Published date | 29 July 2014 |
| Author | Kim Hin David Ho,Satyanarain Rengarajan,John Glascock |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
An examination of the structure
and dynamics of Singapore’s
maturing Central Area
office market
Kim Hin David Ho
Department of Real Estate, School of Design & Environment,
National University of Singapore, Singapore
Satyanarain Rengarajan
Department of Real Estate, National University of Singapore, Singapore, and
John Glascock
UC Real Estate Center, School of Business, University of Connecticut, Storrs,
Connecticut, USA
Abstract
Purpose – The purpose of this paper is to examine the structure and dynamics of Singapore’s Central
Area office market. A long-run equilibrium relationship is tested and a short-run adjustment error
correction model are estimated, incorporating appropriate serial error correction. The long-run
equation is estimated for office rent, with office employment and available stock.
Design/methodology/approach – With the vector error correction model (VECM), the lagged rent,
available stock, office employment, vacancy and occupied stock (OS) can impact the rental adjustment
process. Equilibrium rent on the whole reacts positively to lagged rents, available stock, office
employment, OS and negatively to vacancy rates (VC). Past levels of positive change in VCand rental
growth can have negative effects on current OS.
Findings – While good economic conditions signaled by increases in rents increase the supply of new
stock (available space), higher rents and VC dampen the long-term occupied space (space absorption)
in accordance with economic theory. Available stock can be forecasted by past rent and absorption
levels owing to the developer’s profit-driven nature.
Research limitations/implications – An understanding of the interaction between the macroeconomic
variables and the Central Area office market is useful to domestic and foreign investors and
developers, who then can better evaluate their decision making in commercial real estate investment
and development projects.
Practical implications – It is implicit that the Singapore Central Area office market requires at least
a year before any rental increase can potentially dampen the space demanded. Firms are attracted to
locate there owing to agglomeration economies and they are willing to pay premium office rents
in conjunction with office space intensification in the Central Area. Newly built space is positively
affected by past rents. Urban Redevelopment Authority and private real estate developers should be
wary of excess office sector vacancies by avoiding over supply,even though an increase in the supply
of office space in the Central Area can have a positive impact on office rent in the longer term. Most of
the office space development would tend to meet the demand in the long run. Rental stickiness is
exemplified as rental changes are affected by lagged rent.
Social implications – Policy makers are better enabled to stabilize the officesectors of the real estate
market if so required.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Received February 2014
Accepted May 2014
Journal of Property Investment &
Finance
Vol.32 No. 5, 2014
pp. 485-504
rEmeraldGroup Publishing Limited
1463-578X
DOI 10.1108/JPIF-02-2014-0013
The authors would like to acknowledge the kindly assistance of Ms XU, Pei Ju for her initial
analysis in this paper’s study.
485
Singapore’s
maturing Central
Area office
market
Originality/value – The paper adopts the VECM and validated by empirical evidence, to investigate
the long-run equilibrium relationship and short-term corrections underlying the dynamics of the
SingaporeCentral officemarket. Delayin the restorationof equilibrium in realestate markets isattributed
to factors like lease terms and supplylags.
Keywords Cointegration, Macroeconomic variables, Prime office sector, Singapore Central Area,
Vector error correction model, Serial error correction
Paper type Research paper
Introduction
Real estate forecasts of rent are of great importance for market level and individual
property valuations as it helps investors to create optimal po rtfolio allocations. Until
recently, econometric modelling of commercial real estate was often thwarted owing to
the limited scope and reliability of time series data. However, and recently with ne arly
three decades of data availability in the USA and the UK, there has been an increase in
empirical contribution in predictive modelling of commercial market behaviour (Ball
et al., 2002). In this paper, and via adopting the vector error correction model (VECM),
we provide useful insights into the short-run and long-ter m dynamics of Singapore’s
Central Area office market.We analyse Singapore’s Central Areaoffice market behaviour
since this office market dominates the CentralArea with the concentrationof investment
grade-A office assets. While the real estate market, as a whole, contributes significantly
to wealth creation,office accommodation is an essential revenue-generating sector of the
economy. Such a keyeconomic sector is likelyto expand in line with Singapore’s Ministry
of National Development’s effort in promoting Singapore as a global financial hub.
An understanding of the underlying factors that affect the behavioural structure of the
office sector is important, as it helpsthe economy to be positioned asone of Asia’s leading
financial centres. Office space demand, being a derived demand, is often a result of the
filtering effect of multi-round demand expansion of the financial, business and other
services sectors. It is meaningful to examine the underlying macroeconomic drivers like
employment growth, vacancy rates (VC) and other supply and demand variables, in
affecting Singapore’s Central Area office rental behaviour. Having an improved knowledge
about rental growth can allow a better understanding of real estate value dynamics (Ling
and Archer, 2005). It can also reflect the space market supply-market balance or imbalance.
Hence, it acts as an indicator of opportunities for investors and developers.
There is a dearth of empirical work that examines Singapore’s Central Area office
market. This sub-regional office market is important to analyse in-depth because
it is where the prime office grade-A and some grade-B investment stock are found. This
Central Area office market has the largest modern office market in terms in floor-space
and investment values, as a result of deliberate and strict urban planning rules and
regulations, to control the Central Area’s geographic boundaries at the southern tip of
Singapore, by the Urban Redevelopment Authority (URA) that is the national planning
authority since 1970. Through the implementation of the Master Plan and the
Development Guide Plans, land in Singapore is allocated according to its highest and
best use under various optimal uses. As a result, the prime office sector in Singapore
consists of the Raffles Place Central Business District (CBD), Shenton Way CBD
and the Marina CBD in the Central Area. The rest of the office sector are located in
the decentra lized areas. Market dema nd, supply and gross rents o f Singapore’s office
accommodation island wide are collated by the URA by several regions (districts)
like the Downtown Core, the Fringe Area, the Orchard Planning Area, Outside of the
Central Region and the Rest of Central Area (see Figure 1).
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