Grade A office rents to be hit amid uncertainty in financial sector

The collapse of Lehman Brothers is set to hit Asian office rental rates.

Banks are traditionally the largest users of Grade A office space in the region, and they are likely to cut back on expansion plans and even consolidate current operations in the year ahead.

In the region’s major office markets, Tokyo’s prime rentals are leading the decline.

Others are expected to follow suit over the next 12 to 18 months.

In Tokyo, the cost of each tsubo – or 3.3 square metres – of office space fell for the first time in 35 months in July.

And office rents in similar financial hubs like Hong Kong, Shanghai, and Singapore are likely to go down this road, as the banking industry continues to stumble in this uncertain period.

Colin Tan, Head of Research and Consultancy, Chesterton, said: “There may be more mergers and some banks may actually fold up. And I think this (would have an impact) in the sense that banks are usually the largest user of office space.”

Rental cycles across the region have already been peaking in key cities.

And analysts said a larger-than-expected fall in demand will exacerbate declines.

Grade A office rents in Singapore have fallen from a peak of about S$18 per square foot per month to about S$14. And analysts said it is likely to fall further to S$10 in 2010, which is when the first phase of the Marina Bay Financial Centre is expected to be completed.

Meanwhile, Merrill Lynch analysts expect rents to fall to S$8 by 2011.

Donald Hang, managing director, Cushman & Wakefield, said: “We will probably see developers and landlords trying to activate tenancies on a quicker basis rather than a delayed basis. Last year, a vacant space (would have seen) a rental increase of 5 to 6 per cent, which is why rents went up almost double. But this year, rentals have peaked; it pays to get the premises let out rather than keep it vacant.”

This means companies can expect a tenant’s market ahead.

And with the major support for office space demand weakened, analysts said local firms will be the ones keeping the market afloat.

Mr Han said: “If we look at the last six months, if you asked me the same question, I will be looking into the continued growth in the financial, services sector. But with the recent bankruptcy news we have seen from the US, I think the growth from the financial sector will probably be muted for the time being. And the continued growth…will be more focused on local companies.

“For instance, in Japan and China, we see more Japanese and Chinese corporates looking to consolidate their offices under one building.”

US office REITs in the centre of the storm took a dive on Monday before recovering slightly over the past few days.

Source : Channel NewsAsia – 18 Sep 2008

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