Slow demand for office space hits rents

SINGAPORE’S booming office market is facing a drop in demand and a slowdown in rents that have left many wondering: What happens next, when a host of new developments are launched?

Tight supply and high demand, mostly from financial institutions, made Singapore the ninth most expensive office market in the world, ahead of rival Hong Kong, according to property consultant CB Richard Ellis. Rents nearly doubled on-year last year, after rising by more than 50 per cent in 2006.

The Government started boosting land supply two years ago, but a global financial crisis that has made companies increasingly cost-conscious, and the increase in supply, is sounding alarm bells for analysts.

“We are increasingly concerned about the risk of demand falling short of expectations,” Citigroup said in a report.

“The strong Singapore dollar, the high rental rates, the slowing economy and the uncertainties surrounding the financial industries are likely to put a lid on new demand for office space.”

Citigroup estimates that rents could fall 30% to 35% by 2011 as a host of new office buildings are expected to be ready for occupancy.

Singapore currently has 71 million square feet of office space, and is expected to add about 10 million by 2012.

Official second-quarter figures on office rents and occupancy aren’t out yet, but according to CB Richard Ellis, average prime and top classed Grade A office rents edged up just 0.8% and 0.6%, respectively, in the quarter over the previous three months. And even though Grade A office vacancies remained tight at less than 1%, the rate just outside the central business district rose to 7% from 4.6%.

Government figures for the first quarter of the year already show vacant office space in the island grew slightly over the previous three months, while the pace of rental increase has slowed considerably since the second half of last year.

While landlords, including real estate investment trusts, will obviously feel any pinch arising from lower rents, there could be a lag before the pain sets in.

According to Kim Eng analysts Wilson Liew, many property owners are still charging rents locked in years ago, which are probably still below market prices in the near future.

He estimates rents should fall to S$15 to S$16 per square foot over two to three years, from a current average rate of S$18.

Heavyweight real estate investment trust CapitaCommercial Trust, however, is less pessimistic about the near term, saying Wednesday that, because of tight supply, office rents should remain relatively stable over the next two years, although it still expects a decline in 2010 and hasn’t given estimates for 2011 – when the bulk of new supply will come online.

“Beyond that, it depends on what the take-up will be for the new buildings,” said Lynette Leong, chief executive of CapitaCommercial Trust Management, the trust’s manager.

Nobody is suggesting the market is in for a hard landing, but already, many companies that rent are beginning to reevaluate their leasing strategies.

That includes renting offices in Singapore’s suburbs to avoid the high rents and the space crunch of the business district, property consultancy DTZ said.

Citibank, DBS Group and Standard Chartered have all announced plans to expand or relocate some operations to a business park in Changi.

Source : Today – 25 Jul 2008

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