Singapore office market on the way to rebound

Rent-free incentives are still observed despite data showing increased business sentiment and more confidence in economy.

The Singapore office market started the year of 2010 with increased business sentiment and more confidence in the overall economy. Whilst Jones Lang LaSalle's preliminary estimate of average CBD Prime Grade A gross effective rent showed a marginal decline of 0.6% q-o-q to $7.75 per sq ft per month in 1Q10, the general sentiment is one of stabilisation. This also shows a y-o-y decline of 28% compared to that of 48% in 4Q09.

The return of market activity from the previous quarter continued to be instrumental in bringing rentals closer to their bottom. Most landlords in the market were able to maintain their rentals. Nevertheless, rent-free incentives were still observed in certain transactions.

"Whilst some segments of the market have seen slight corrections, on the whole we have seen a stabilising of market rents across the board," Mr Chris Archibold, Head of Commercial Leasing at Jones Lang LaSalle, noted.

In terms of demand, Jones Lang LaSalle's preliminary data suggest that vacancy has dropped in 1Q10 in several key market segments, including Prime Grade A offices where the vacancy rate dropped from about 4% in 4Q09 to about 3% in 1Q10. These mostly resulted from the fine performance of prominent Prime Grade A office buildings such as Republic Plaza, UOB Plaza 1, Capital Square and One George Street in terms of securing tenants and reducing vacancies.

Major relocation deals such as Nomura Singapore taking up more than 100,000 sq ft in Marina Bay Financial Centre (MBFC) Tower 2 underpinned leasing activity in 1Q10. This trend of replacement demand is believed to linger on in the near future as tenants seek value for money in moving to high quality buildings.

Jones Lang LaSalle also expects to see further notable acquisitions in the coming months. Signs of increased corporate expansions were seen during 1Q10 on the back of improved business outlook. Aside from the impending demand from the legal sector, Jones Lang LaSalle noted recently that insurance companies are starting to look at headcount growth of about 5% this year while banks are seen to be hiring across the board.

Going forward, with the potential oversupply of office space and increased competition amongst landlords, the high end segment of the office market, which includes a growing portion of international standard Grade A properties, is reckoned to be able to take advantage of the "flight to quality" phenomenon and command premium over existing older buildings as demand finally returns to the market.