CapitaLand Integrated Commercial Trust - Annual Report 2021

GRADE A CBD CORE OFFICE CAPITAL VALUE AND NET YIELD Grade A CBD Core capital values expanded by 3.5% y-o-y to S$2,950 psf in 4Q 2021. Over the same period, implied Grade A CBD Core net spot yields rose slightly by 3 bps to 3.48%. In anticipation of improving rents, capital values in the office market are expected to move upwards, most likely at a greater magnitude than rents. Moving forward, Singapore’s office sector will continue moving up as anticipation more than outstrips fundamentals. Office Market Outlook With an increase in demand for digital services and payment processing by consumers and corporates due to safe management measures and social isolation, as well as a resultant increase in headcounts, the technological sector is expected to remain a key driver for leasing activity in the office market in 2022. Additionally, companies in the non-bank financial services sector, such as investment management, hedge funds and private wealth could also be major demand drivers for leasing in Grade A offices. While work from home was the default work arrangement for most firms in 2021, the challenge would be for occupiers to calibrate their space requirements between adopting a hybrid working model and encouraging employees back to the office. In the case of the latter, the creation of safe and conducive environments that promote camaraderie, company culture and innovation will be amongst the priorities of firms. Many firms will also be likely to incorporate technology tools into their business operations as part of their growth objectives as they move towards a new normal in 2022 and beyond. Going forward, underpinned by tight vacancy, the mid-term outlook for the office market looks sanguine. With the ongoing trend of flight-to- quality, there has been a slow but steady rise in commitment levels of some existing and pipeline projects. New developments with high quality specifications are the likely beneficiaries as occupiers continue to show preferences for prime new offices instead of ageing office stock. As such, the recovery of the office market is expected to be further led by the Grade A segment, while growth in the Grade B segment trails behind. Supply for office stock, particularly in the CBD will be influenced by a few factors. Supply chain disruption and a lack of manpower due to border restrictions may result in higher construction costs and potential delays in some projects. Additionally, the CBDI and SDI schemes may result in more urban renewal projects, potentially reducing older office stock over the next few years. With a limited new supply of Grade A CBD Core offices in the pipeline, coupled with sustained demand from sectors such as technology and the non-bank financial services sector, CBRE expects office rents in the Grade A CBD Core micro-market to increase in the mid-term. 3,050 3,000 2,950 2,900 2,850 2,800 2,750 2,700 2,650 2,600 2,550 1Q 2017 2Q 2017 3Q 2017 4Q 2017 1Q 2018 2Q 2018 3Q 2018 4Q 2018 1Q 2019 2Q 2019 3Q 2019 4Q 2019 1Q 2020 2Q 2020 3Q 2020 4Q 2020 1Q 2021 2Q 2021 3Q 2021 4Q 2021 Capital Value (S$ psf) Grade A (CBD Core) Capital Value (LHS) Grade A (CBD Core) Net Yield (RHS) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Net Yield % Source: CBRE Singapore, 4Q 2021 $3,000 $2,750 $2,950 $2,850 $2,950 CapitaLand Integrated Commercial Trust 110 Independent Market Review