Office rent growth hits record low in 3Q 2011

Grade A office rents crept up a mere 2% to S$9.08 psf/month, the lowest quarterly growth since 2Q 2010.

According to the latest quarterly research conducted by international property consultant, Colliers International, Singapore’s office property market has cooled further in 3Q 2011 – weighed down by the tumultuous macro-economic environment due to the United States and the euro-zone’s stalled economies and their debt woes.

The renewed global economic woes further softened demand for office space, which has already slowed in 2Q 2011, when the Singapore office property market entered into a normalisation phase – following the stabilisation in demand by large space occupiers.

In 3Q 2011, overall Central Business District Grade A office rents crept up by a mere two per cent quarter-on-quarter to S$9.08 per sq ft per month – the lowest quarterly growth since 2Q 2010.

The overall CBD Grade A office gross rents also remained 36.1 per cent below the S$14.22 per sq ft per month achieved during the peak in 3Q 2008.

Mr Calvin Yeo, Executive Director of Office Services, Colliers International, says, “The overall CBD Grade A office rents were largely supported by selected prime buildings in the Raffles Place/New Downtown micro-market, such as Asia Square Tower 1, Marina Bay Financial Centre, Ocean Financial Centre and OUE Bayfront, which have strong offerings and, as such, the ability to sustain rents.”

The average gross rent of Grade A office space in the Raffles Place/New Downtown micro-market grew by 3.6 per cent QoQ to reach S$10.77 per sq ft per month. This is still some 39.8 per cent lower than the S$17.89 per sq ft per month achieved during the peak in 3Q 2008.

Meanwhile, the average monthly gross rent of Grade A office space in the Orchard Road micro-market rose 3.8 per cent QoQ to reach S$9.04 per sq ft in 3Q 2011.

Occupancy Rates
The uncertain global economic conditions has resulted in a relatively quiet leasing market in 3Q 2011– given that many companies adopted a more cautious stand on their expansionary plan, while others renewed existing leases to avoid capital expenditure.

Such lease renewals have helped to keep Grade A office occupancy rates in the different micro-markets at a healthy level of more than 90 per cent in 3Q 2011. However, the overall take-up rate still lagged behind the supply made available from both new office completions and those vacated by tenants who have moved to newly-completed buildings.

Consequently, the average CBD Grade A office occupancy rate continued to slip from 93.5 per cent in 2Q 2011 to 92.6 per cent in 3Q 2011 – the lowest occupancy level in six quarters.

Mr Yeo comments, “The fall in occupancy rate was led by the Raffles Place/New Downtown micro-market, which dipped 3.3 percentage points – due mainly to a spike in the available stock of office space, arising from the completion of Asia Square Tower 1 and secondary space from tenants who had relocated.”

As of 3Q 2011, the occupancy rate of Grade A office space in the Raffles Place/New Downtown micro-market stood at 90.9 per cent, a level not seen since 4Q 2005.

On the other hand, the City Fringe micro-market bucked the trend, with its occupancy rate strengthening by 2.4 percentage points in 3Q 2011 to 97.6 per cent.

Mr Yeo adds, “This could be attributed to businesses opting to move office functions that do not require a CBD location to the city fringe for cost efficiency. Moreover, new-generation office buildings that are located in the city fringe areas now provide Grade A building specifications, but atcomparatively-lower rents.”
Capital Values

The office property sales market was also not spared by fears of a global economic slowdown, which somewhat affected investors’ appetite for office buildings. Many turned cautious towards new property purchases, but sellers, on the other hand, remained bullish with their asking prices – given the low interest rate environment, as well as the limited supply of saleable prime Grade A space in Singapore.

The stalemate between the investors and sellers, hence, resulted in a sluggish growth in the capital values of office space.

Average capital values of Grade A office space in the Raffles Place/New Downtown micro-market rose by a marginal 2.4 per cent QoQ in 3Q 2011 to reach S$2,460 per sq ft. This is a further dip from the 3.5 per cent QoQ growth recorded in 2Q 2011, as well as some 12.6 per cent below the peak of S$2,814 per sq ft in 3Q 2008.

Outlook
In the immediate months, the Singapore office property market looks likely to stay caught in the renewed concerns of a global economic slump – causing businesses to hold back on capital expenditures and consequently, affecting new occupier demand.

Nonetheless, Singapore has in place healthy business and economic fundamentals that could help prop up demand in a slowing economy.

Apart from being the one of the leading financial hubs in the region, Singapore is also increasingly becoming the financial centre of choice for the global rich who are looking for a safe haven to park their wealth.

Additionally, the Singapore government is spurring economic activities by securing tie-ups with major institutions, such as HSBC and the Singapore Business Federation, to tap on their strong business support services and global networks to woo global mid-sized companies and Asian enterprises. Such activities are expected to support a long term sustainable demand for office space in Singapore.

Ms Chia Siew Chuin, Director of Research & Advisory, Colliers International, says, “Essentially, Singapore’s average CBD Grade A office space is still about 30 per cent and 20 per cent cheaper than those of Hong Kong’s and Tokyo’s, respectively. Additionally, Singapore’s 11.3 million sq ft of new office supply in the pipeline till 2016 – compared to the office supply crunch in Hong Kong – gives the Republic an edge over other developed regional cities in attracting corporations who are looking to set up or relocate their bases to Asia from the woe-plagued western cities.”

Although the fuzzy global economic outlook will inevitably take its toll on business sentiments, demand for office space may still be sustained at a relatively-healthy level; thereby, providing the support for rents and capital values to hold firm in the near term.

Ms Chia concludes, “Given that Grade A office rents in the Raffles Place/New Downtown micro-market has risen by 19.7 per cent in the first nine months of 2011, its full-year growth could cross the 20-percent mark, but should remain below 25 per cent.”