Hind Group sells Keong Saik Road hotel amid buzz in shophouse market

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HIND Group is selling Naumi Liora, a 79-room boutique hotel housed in 10 adjoining freehold conservation shophouses in Chinatown.

The price is understood to be S$75-S$76 million, which works out to about S$2,800 per square foot on a gross floor area (GFA) of just over 27,000 sq ft.

The shophouses, which are along Keong Saik Road, span two storeys and an attic.

Hind Group, controlled by the Jhunjhnuwala family, bought the property in 2011 - when it was known as The Saff Hotel - for nearly S$42.1 million. The property was spruced up and then relaunched under the group's Naumi brand the following year.

Rooms at Naumi Liora cost S$150 to S$230 a night.

When asked why Hind Group is selling the hotel, its founder and managing director Surya Jhunjhnuwala said: "Our current strategy, going forward, is to focus on what Naumi does best - offering a bespoke luxury experience.

"We now find that Liora does not fit into this mould, and as a group, we will be focusing on expanding to properties that can fulfil this."

The new owner of 47 to 65 Keong Saik Road is 8M Real Estate, a privately-held boutique property investment group founded in 2014 by Ashish Manchharam.

8M Real Estate said the Hind Group may continue to operate the Naumi Liora for about a year after the property transaction is completed next month.

At the moment, the ground floor of two of the shophouses is leased to Loh Lik Peng's Unlisted Collection, which operates The Library, a cocktail bar styled like a speakeasy.

Some hotel rooms are now on the ground level of some of the shophouse units, and Mr Manchharam plans to convert these into food and beverage (F&B) outlets.

"We want the entire ground level of this asset as F&B outlets because this provides higher value from a rental perspective. Keong Saik is an established F&B location and we plan to curate new concepts to enhance the area's pull.

"This would be similar to what we did at 112 to 116 Amoy Street, where we carved out six new F&B outlets from the space that was previously leased to a single Chinese restaurant."

The upper levels of the Keong Saik Road property could remain as a hotel or be converted to offices to optimise the large floor plate, he added.

In April, 8M Real Estate had picked up three adjoining shophouses at 28, 30 and 32 Ann Siang Road, a corner island site, for S$52 million.

It is also understood to have acquired three adjoining 999-year leasehold shophouses along Boat Quay for S$32-S$33 million. The shophouses have a total land area of about 4,000 sq ft and a GFA of around 11,500 sq ft.

One of the shophouses is tenanted; the other two are empty.

Gary Nonis, national director of retail at JLL, has been appointed to find tenants for these two units.

"We are marketing about 8,600 sq ft lettable area spanning three levels. There is also some 1,000 sq ft of outdoor refreshment area that will be leased to the ground-floor operator or operators."

The Boat Quay and Keong Saik Road acquisitions were made through sale of shares in the companies owning the respective properties; the deal at Ann Siang Road is an outright property purchase.

Including its latest buys, 8M Real Estate now has a portfolio of shophouses worth more than S$400 million. Its earlier acquisitions are in places like Gemmill Lane, Amoy Street, Tanjong Pagar Road, Neil Road, Craig Road and Hongkong Street.

8M Real Estate is owned by Mr Manchharam, together with some investors.

The Ann Siang Road property spans three storeys in addition to a basement and rooftop area. The building is named The Club and leased to Harry's Hospitality, which runs a mix of four F&B outlets and a 20-room hotel.

The lease with Harry's Hospitality has another 21/2 years to go. Its current rental reflects about 3.5 per cent net yield based on 8M Real Estate's purchase price.

Hind Group, after selling Naumi Liora, will be left with only one hotel in Singapore - Naumi Hotel in Seah Street, near Raffles Hotel.

Mr Jhunjhnuwala noted that this property has already been upgraded twice, the last time being in 2014.

He added: "This will be our flagship hotel, as we have spent tens of millions on the upgrades.

"In fact, there are plans for a further facelift so that it remains one of the top luxury boutique hotels in Singapore."

Hind Group also owns a 200-room hotel in Auckland Airport, which is being refurbished. It will be flagged as a Naumi by September.

It also owns Rendezvous Sydney Central, for which there are plans for a S$30 million upgrade to a Naumi Hotel.

Mr Jhunjhnuwala, whose family once owned the former Imperial Hotel in the River Valley/Jalan Rumbia area, said: "We are now embarking on an ambitious expansion plan and looking to acquire hotel properties globally, with investments up to half a billion Singapore dollars in the next three years.

"We are in negotiations for acquiring hotel properties in Australia, New Zealand and London. Naumi Hotels is a Singapore brand and will continue to have its headquarters here."

According to CBRE Research's analysis of URA Realis data as at Wednesday, 49 caveats totalling S$369 million were lodged for shophouse purchases in the first five months of this year.

However, this figure excludes deals for which buyers have not lodged caveats; this could be the case for those involving share sales in companies that hold shophouses.

8M Real Estate's recent purchases of the Boat Quay and Keong Saik Road properties totalling about S$108 million are instances of this.

CBRE director of capital markets Sammi Lim said: "Shophouse sales volumes and transaction values continue to hold, reflecting sustained interest in this niche asset class. Shophouses continue to be sought after due to their limited supply."

Buyers include local and foreign ultra-high-net-worth investors and family funds which are taking a mid- to long-term view.

"The pool of serious investors exploring this asset class will widen further with the entry of more boutique institutional funds exploring shophouses to add to their portfolio for diversification," she added.

Source: Business Times, 9 Jun 2017

For office decentralisation to work, supply of non-CBD space must expand to improve rental draw

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DECENTRALISATION was first mooted in Singapore in the 1991 Concept Plan. A hierarchy of commercial centres ranging from fringe, sub-regional and regional centres fanning out from the Central Area was proposed as a means to bring work closer to home and alleviate congestion in the city centre.

Fast forward 25 years and prime decentralised office stock, which has stagnated at two million sq ft since 2007, constituted just 10 per cent of total CBD prime office stock as of the end of 2016.

This can be attributed partly to the lower supply of land released for office development in the decentralised areas compared to that in the CBD in the last ten years.

In fact, the land supply released via public land sale initiatives, such as the Government Land Sales (GLS) programme for office development in the decentralised area since 2007, would hardly be sufficient to replace the older, obsolete stock, much of which has been demolished or downgraded to Grade B and below.

 

On the other hand, new CBD Grade A office supply that came on stream between 2007 and 2016 arising from public land sale initiatives almost quadrupled that of the decentralised region.

SEE ALSO: DBS selling PwC Building; deal values property at S$747m

 

The continual rejuvenation of some older CBD stock, such as Ocean Financial Centre and OUE Bayfront, further boosted Grade A office supply in the CBD.

As a result, CBD Grade A office stock doubled from 2007 to 2016.

The slower rate of growth in decentralised prime office stock compared to that of the CBD resulted in the tightening of rental gap between the two sub-markets.

While the influx of Grade A office supply in the CBD weighed down on prime rents, the limited supply of Grade A decentralised office space kept the vacancy rate low at 1.6 per cent as of end-2016 and helped rents stay resilient against downward pressure.

As the ratio of decentralised stock to CBD stock tightened from 1:5 in 2007 to only 1:10 by 2016, the rental gap between the two sub-markets narrowed from 56 per cent in 2007 to 34 per cent in 2016. This provided little incentive for occupiers to forgo the convenience and prestige of a CBD location for decentralised space.

The abundance of modern and prestigious office developments with high and efficient specifications in the CBD further drew occupiers into the CBD and away from the decentralised locations where good quality space was limited given the tight vacancy rate of 1.6 per cent as of end-2016.

Perhaps there is a lesson to be learnt from the office market in Hong Kong. There, developers have been building more office developments outside the CBD because of the lack of land. The lack of any substantial rejuvenation of existing buildings in the CBD further accentuated the large disparity in the quantum and quality of decentralised versus CBD office stock. The amount of the former has grown by about 38 per cent over the past ten years, on a square foot basis, while the total of the latter has remained largely stagnant.

The lack of new Grade A office stock in Hong Kong's CBD, coupled with the influx of Chinese firms during the 2013-16 period, drove prime CBD rents skywards.

On the other hand, the adequacy of decentralised stock in supporting demand kept the gap between decentralised and CBD prime rents at a wide margin of 67 per cent as of end-2016. The lack of new CBD prime office stock, high CBD rents and the availability of good quality decentralised office space resulted in a substantial number of occupiers moving out of CBD into decentralised office buildings.

Drawing comparisons between Singapore and Hong Kong, the availability of Grade A office stock (or the lack thereof) in decentralised locations in relation to the CBD has affected the behaviour of tenants and the movement in rents.

In Singapore, the limited rental gap of 34 per cent as of end-2016 between prime CBD and decentralised office rents reduces the motivation for tenants to relocate to decentralised buildings. Moreover, the supply of quality office space in decentralised locations is tight, with the vacancy rate at a low of 1.6 per cent as of December 2016. Should this continue, the rental gap between the two sub-markets could tighten further, discouraging relocation and dampening Singapore's decentralisation efforts.

Any increase in the supply of decentralised office space, while at the same time moderating supply in the CBD, could help to widen the rental gap from the current 34 per cent.

In our view, a rental gap of at least 60 per cent would be needed to provide a sufficient cost-saving incentive for businesses to consider decentralised office locations. This, coupled with space efficiency, modern specifications and the green credentials that come with the new stock, particularly if they are located within or in close proximity to transportation nodes, could tip the balance for corporate occupiers in opting for decentralised over CBD locations for part or all of their business functions and where a CBD address is not of great importance.

The adoption of a mixed-use development format (in particular, office and retail) would further elevate the attractiveness of decentralised offices and provide a win-win formula for all stakeholders. Office and retail uses are complementary as the availability of supporting services and amenities in the retail space would provide convenience for office workers who in turn would form a natural shopper catchment for the retail and F&B businesses.

For developers, mixed-use projects reduce the development and investment risks, while from the planning point of view, the availability of mixed-use developments lowers the propensity to develop a large number of supporting amenities in the nearby vicinity, thereby allowing efficient allocation of land resources.

In conclusion, for decentralisation to reach its full potential, it is necessary for Singapore to increase the supply of such space so that a compelling rental gap can be attained to motivate businesses to relocate. The adoption of the mixed-use development format (e.g. office/retail) and ensuring that they are located within or in close proximity to transportation nodes would further ensure a winning formula.

At the end of the day, the availability of a diverse range of office space and locations at varying price points would be a magnet drawing more businesses to set up in Singapore.

Source: Business Times, 24 Mat 2017

Office Deals Drive Singapore Real Estate Investment Sales Up 67.4% Year On Year In Q1: JLL

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The value of Singapore real estate investment deals jumped 67.4 per cent in the first three months of 2017 to S$4.99 billion from S$2.98 billion in the year-ago quarter, according to a report by property services firm JLL on Monday (May 8).

The quantum however was 40.9 per cent lower than the S$8.44 billion worth of sales made in the previous quarter. Market activity was dominated by the private sector with the S$4.47 billion concluded accounting for almost 90 per cent of all of the first quarter's total sales value.

JLL said the office sector was the star performer and the only sector that posted quarter on quarter growth. It accounted for 47.5 per cent of private investment sales in the first quarter.

Said Ms Tay Huey Ying, head of research & consultancy at JLL Singapore: "In all, investors injected about S$2.12 billion worth of capital into the sector in the first quarter. This not only represented a 60.6 per cent quarter on quarter jump from the preceding quarter's S$1.32 billion, it was also the highest first quarter private sector office investment sales value amassed since 2008 when two billion-dollar deals involving One George Street and Singapore Power Building propelled sales to S$3.41 billion."

The top two office deals in the quarter involved the sale of entire buildings: The entire interest in the holding company of PwC Building was sold to an indirect subsidiary of Manulife Financial Corporation for S$760.60 million, while the entire interest in Plaza Ventures, the registered owner and developer of GSH Plaza, was sold to Hong Kong-listed Fullshare Holdings for S$725.21 million.

Private sales of residential properties worth S$5 million and above apiece fell 35.3 per cent quarter on quarter to S$1.69 billion, although this still placed the sector on the second spot on the quarter's private sector investment sales chart with a 37.7 per cent market share.

Private sales of S$5 million and above retail and industrial properties slipped more than 50 per cent quarter on quarter and each accounted for less than 10 per cent of the quarter's private sector investment sales. Sales of hotel and mixed-use properties remained muted, with no known major transactions in the first quarter.

Source: Straits Times, 8 May 2017

Office market deals pick up

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The office market is now abuzz, as sentiment has swung from pessimism to optimism in just one year. Fears of an oversupply in the office market 18 months ago have evaporated, with investors now forecasting a period of relatively modest supply in 2018 to 2020. Jeremy Lake, CBRE executive director of capital markets, observes: “Singapore goes through periods of too much office space, and then periods of relative shortage.”

In the first four months of 2017, $3.39 billion worth of office deals were transacted. They include deals valued above $100 million, ranging from the sale of substantial strata space to stakes in a building or an entire building. The latest office deal done early this month was the sale of a 50% stake in Grade-A office building One George Street for $590 million ($2,650 psf). The buyer was FWD Group, the insurance arm of investment vehicle Pacific Century Group, controlled by Richard Li, the younger son of Hong Kong’s richest tycoon Li Ka-shing.

CBRE brokered four of the six office deals done so far this year, amounting to $1.91 billion, or 56% of the total $3.39 billion transacted. This includes the sale of the 50% stake in One George Street and DBS Bank’s entire interest in the holding company of PWC Building to an indirect subsidiary of Manulife Financial Corp for $746.8 million, considered one of the biggest office deals in 1Q2017.

The two other office deals brokered by CBRE this year were the sale of Sime Darby Centre to Tuan Sing Holdings for $365 million; and the sale of 79,500 sq ft of strata space in Prudential Tower to private-equity firm, One Tree Partners, for $206.6 million (see table).

The remaining two office deals that CBRE was not involved in were direct deals between the vendors and buyers. One was the sale of the entire interest in Plaza Ventures Pte Ltd — the registered owner and developer of GSH Plaza — to Fullshare Holdings for $725.2 million. The other direct deal was the sale of the 61% stake in Triple One Somerset to Hong Kong-listed Shun Tak Holdings for $758.2 million.

Source: The Edge Property, 13 May 2017

Singapore On Track For Record Real Estate Deals In 2017: RCA

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Singapore posted one of the strongest performances in inbound real estate investment volume in the Asia-Pacific region for the first quarter this year.

The total deal value increased 170 per cent to reach US$2.3 billion, from US$838.2 million a year ago, according to a report released by Real Capital Analytics (RCA) on Friday.

Petra Blazkova, RCA's senior director of analytics for Asia-Pacific, told The Business Times: "In the last couple of years, Singapore has been through fairly slow market growth on the rental income side. The economy was quite subdued, so investors were shying a little bit away from Singapore because they couldn't foresee when the trend for growth would come.

"I don't necessarily see the strong rental growth appearing in the market as we speak right now, but somehow confidence has returned to the market, and I think it started with the first sale of Asia Square Tower One last year. That was the trigger."

As at April 2017, there were some 18 deals worth a total value of US$5.3 billion in contract.

These include the potential sale of Asia Square Tower Two, purportedly to CapitaLand and CapitaLand Commercial Trust at close to S$2,800 per square foot on net lettable area, as well as Jurong Point, which is in the midst of being transacted at S$2.2 billion between buyer Mercatus Co-operative and seller, a joint-venture between Lee Kim Tah Holdings and Guthrie GTS.

At this rate, Singapore appears to be on track to achieve record volumes in 2017, said Ms Blazkova.

"That's quite a high number for a relatively small market like Singapore. It's quite a good mix, too," she added, looking at the deals in the pipeline. "There are a few office transactions, some retail and also some industrial."

Most other markets in the region - Japan, China, Hong Kong, Australia, India and Taiwan - showed a drop in investment volumes, which RCA attributed to a shortage of investment-grade properties in the region's commercial real estate markets. Many real estate owners are also opting to retain their holdings on their assets.

Overall, the value of completed transactions for income-producing real estate in the Asia-Pacific fell by 21 per cent year on year for the first three months to US$22.6 billion - the lowest figure recorded since Q2 2010.

Australia led the slowdown in investments with a 59 per cent slide in deals, as it was the hardest hit by the imbalance in investment-grade properties.

Ms Blazkova said that in most places, there is a large group of investors looking at a small pool of assets, whereas in Singapore there has been a fair amount of assets available for sale, which has helped to support its transaction volume.

"It's the behaviour of the sellers in Singapore at the moment after a long time of sitting on their assets," she said.

Acute shortages of available stock in other countries have also affected pricing, and a mismatch in pricing expectations between buyers and sellers can lead to stalemate in closing deals.

The top three markets with the highest investment volume in the first quarter - Japan, China and Hong Kong - each registered weaker investment flows, contrasting against particularly strong activity registered in the same period of 2016.

In its data collection, RCA considered only deals worth at least US$10 million. It also excluded sales of development sites and interested party transactions, such as the divestments of assets from sponsors to trusts.

Investment sales data tends to differ from brokerage to brokerage due to differing definitions of what is considered a completed sale.

Source: Business Times, 13 May 2017

Conserved Orchard Road property up for rent

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A rare opportunity is on offer to become master tenant of a striking heritage state property at the bottom end of Orchard Road.

The property, near MacDonald House, was built shortly after World War I and features exceptional architectural styles, including both Classical and Art Deco features.

The property occupies 26, 28, 30, 32 and 36 Orchard Road, and appears to be unused at present.

In offering the property for an initial three-year tenancy, the Singapore Land Authority (SLA) is taking the unusual step of considering both the price and quality of the tender.

The bids will be assessed holistically, so the site will not necessarily be awarded to the bidder submitting the highest bid price.

Half of the overall score will be given for the bid price and the other half for quality of the concept.

Ms Yap Eai-Sy, SLA's deputy director of business planning and development, said the move towards price and quality tenders "marks SLA's progression as a dynamic master planner for the interim use of state properties and land".

"Recognising the changing times and environmental needs, we hope to be able to provide an expanded range of use for state properties and to encourage greater entrepreneurship," she said.

The property is the last remaining street-block of buildings in Orchard Road. The tender for the tenancy opened yesterday.

Analysts said that the move was a good way for SLA to experiment with the price and quality concept.

Mr Alan Cheong, head of Singapore research at Savills, said: "It's a small step with minimal risk to experiment with the quality and price concept. SLA will be able to see the quality of bids can improve, and may be able to take this style of tender to its other properties."

But he estimated that the market rental rate for the properties is currently about $3 per sq ft to $4 per sq ft, as "it is a nice location, but you have to crack your head to make it work".

He said that he expected the winning bidder to be one with international experience and able to find a concept for the space which may have some restrictions, owing to its conservation status.

CBRE head of research for Singapore and South-east Asia Desmond Sim said that the price and quality concept was a boost for the Orchard Road retail scene, as it will help the bidder to focus on "quality of concept", instead of "financial gains and survival".

"It's at one end of Orchard Road,, so it will not be a one-off project which will save Orchard Road," he said. "However, if a good concept is found, a well-curated concept can become a destination for tourists and locals."

Source: Straits Times, 3 May 2017

CCT divests One George Street for S$1.18b into limited liability partnership

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CAPITALAND Commercial Trust (CCT) has sold One George Street for S$1.18 billion into a limited liability partnership, which it will own 50 per cent of.

CCT will hold 50 per cent of One George Street LLP (OGS LLP) with joint venture partner, OGS (II) Limited, a special purpose vehicle owned by insurer FWD Group. The joint venture partner will hold the remaining 50 per cent.

At S$1.18 billion, the agreed price translates to S$2,650 per square foot (psf) based on the building's net lettable area. It is also 16.7 per cent above the property's valuation of S$1.01 billion (S$2,271 psf) at the end of last year. Based on One George Street's net property income of S$38.0 million for the 12 months preceding March 31, 2017 and the agreed value, the net property yield translates to 3.2 per cent per annum.

CCT is expected to recognise an estimated gain of S$84.6 million on the divestment of the property on a 50 per cent basis. The expected net gain is S$79.7 million.

One George Street is a 23-storey Grade A office building conveniently located near Raffles Place, Clarke Quay and Chinatown MRT stations.

Source: Business Times, 2 May 2017

Office space on demand

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This June, Tjin Lee, founder and managing director of the Mercury group of companies, is moving her public relations and marketing & communications (M&C) teams to the co-working space at The Work Project at OUE Downtown Gallery.

For the past four years, the 26 staff of Mercury PR and Mercury M&C (which handles Singapore Fashion Week), occupied a 4,000 sq ft shophouse on Telok Ayer Street in the CBD. “I think co-working spaces will be the work space of the future,” says Lee. “The vibrant community and dynamic environment will allow my staff to network and interact with people from different fields and industries. I love the buzzy ‘Google campus’ feel of a co-working space. Hence, after 16 years of having an office of my own, I decided to move into a co-working space.”

Incidentally, Lee herself is the co-founder of a co-working space called Trehaus, which is said to be Singapore’s first family-friendly co-working space as it offers child-minding facilities for parents while they work there. However, she is not moving her PR and marketing teams into Trehaus as it does not have the space to accommodate them, she says.

Even though she continues to maintain a second office on Henderson Road for her events company, Mercury Live, which has around 25 staff, Lee estimates that she still enjoys cost savings of 40% by moving into the co-working space.

‘A real shift’ 

“The way people are working is changing dramatically,” notes Junny Lee, founder of The Work Project. The real shift in co-working is that the big MNCs are moving into co-working space, alongside professional services firms such as Mercury PR, small and medium-sized enterprises as well as fast-growth companies, he adds. “It’s no longer about small start-ups moving into co-working space, but the big MNCs.”

The Work Project’s Lee cites CBRE’s Occupier Survey in March, which said that 52% of MNCs in Asia-Pacific consider workplace strategy their No 1 priority and are seeking to invest more in space efficiency programmes.

For example, Australian-listed property group Lendlease will be moving 100 workers in its Asia-Pacific headquarters, including its CEO for Asia, to the co-working space at The Work Project at OUE Downtown Gallery.

This co-working space has expanded to 24,000 sq ft, from 20,100 sq ft last December. The space — with a capacity for up to 350 members — is already more than 60% taken up ahead of its June opening.

The Work Project is located on OUE Downtown Gallery’s fourth floor, where the lifts leading to the higher floors of the office tower and the Oakwood Premier serviced apartments are located. “And it’s a high traffic zone,” says Lee.

Source: The Edge Property, 1 May 2017

Central Region office, retail rents slide even faster in Q1

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But market players see office segment turning around earlier than retail which is undergoing structural changes.

BOTH office and retail rents retreated at a steeper pace in the first quarter of this year amid rising vacancies, according to latest official statistics.

However, the general view is that the office market will probably start to turn around earlier than retail, which faces deep-rooted structural changes in its operating environment.

As Tay Huey Ying, JLL head of research and consultancy, Singapore, puts it: "The retail sector has additional challenges such as changing consumer buying behaviour and patterns beyond the normal cyclical factors. The office market will turn around earlier because supply should taper after the massive completions we see this year and the Singapore economy is expected to post moderate growth."

She predicts a two-tier office market surfacing, with newer Grade A CBD buildings turning the corner earlier in terms of a rental recovery, either by end-2017 or early-2018. "The next wave of rental correction will hit the older and lower-grade office buildings in the CBD as they come under pressure to backfill space vacated by tenants who upgraded to newer projects."

The Urban Redevelopment Authority's (URA) office rental index for Central Region slipped 3.4 per cent in the first quarter, a sharper drop than Q4 2016's 1.8 per cent. Q1's drop is also the eighth straight quarterly fall - the index has eased 17.6 per cent from the recent peak in Q1 2015.

Christine Li, Cushman & Wakefield Singapore research director, said: "The rental decline is the longest streak since the 29.5 per cent drop over 12 quarters between Q2 2001 and Q1 2004."

URA's islandwide office vacancy rate continued to climb, reaching 11.6 per cent at the end of Q1 from 11.1 per cent at end-Q4 2016. The Q1 figure is also the highest since Q1 2012's 11.7 per cent.

Net demand, as reflected in the change of occupied space, shrank by 64,583 square feet of net lettable area (NLA) in Q1, against an increase of 10,764 sq ft in the preceding quarter, according to URA.

The pipeline supply of office space stood at 8.9 million sq ft gross floor area (GFA) at end-Q1, slightly more than the 8.5 million sq ft at end-Q4.

Desmond Sim, CBRE Research head of Singapore and South-East Asia, highlighted that while Category 1 office rents fell 1.8 per cent in Q1, Category 2 rents dropped 3.9 per cent, "indicating that the rental correction is softening for centrally-located offices".

Cat 1 refers to office space in large buildings located in core business areas in Downtown Core and Orchard Planning Area which are relatively modern or recently spruced up, command relatively high rents and have big floor plates. Cat 2 refers to Singapore's remaining office space.

JLL believes that the office rental decline in Q1 stemmed mostly from intense competition among landlords of older and poorer-grade office developments as their tenants took advantage of the soft office rental conditions to upgrade to more efficient spaces in newer projects.

Ms Li of C&W expects Grade A CBD rents to reach their inflexion point by end-2017 and return to growth in 2018. City-fringe and suburban office rentals, however, will continue to face challenges and return to growth only from 2019, she added. "This will result in a growing rental gap between CBD and non-CBD areas over the next two years, which could start driving decentralisation activities especially in regional centres . . ."

Alice Tan, Knight Frank Singapore research and consultancy head, said: "Office rents in Q2 this year will continue to decline albeit at a slower pace as leasing activity picks up. In the second half of this year, should leasing activity gather momentum with improving economic conditions, we might even see office rents bottoming out later this year."

She is sanguine even for older CBD office buildings that have been well-maintained which, according to landlords' feedback, are also starting to see increased leasing enquiries from the likes of tech-related firms, professional services providers and operators of co-working space. "As a result, islandwide office vacancy might stabilise by end-2017," she ventures.

URA's office price index for Central Region contracted 4 per cent in Q1 after easing 0.6 per cent in Q4.

Meanwhile, in the retail property segment, URA's rental index for Central Region decreased at a faster clip of 2.9 per cent in Q1, from 1.2 per cent in Q4. This marks the ninth consecutive quarterly drop in the index, which has fallen 14.6 per cent from its recent high in Q4 2014.

Net demand for retail space contracted by 441,320 sq ft of NLA in Q1 - against a rise of 710,417 sq ft in Q4. The islandwide vacancy rate for retail space crept up to 7.7 per cent at end-March from 7.5 per cent at end-December.

The pipeline supply of retail space rose a tad at end-Q1 to 6.5 million sq ft GFA, from 6.4 million sq ft a quarter earlier.

Ms Tan of Knight Frank predicts that URA's Central Region retail rental index would fall by 5-8 per cent this year. That said, rents for the more resilient prime spaces in malls are likely to moderate by up to 3 per cent in the same period; Knight Frank's prime retail islandwide basket of major malls covers high rent-yielding units of 350-1,500 sq ft with the best frontage, connectivity, footfall and accessibility in a mall. These are typically on the ground level or the basement level linked to an MRT or bus station.

"However," Ms Tan added, "URA's retail vacancy rate islandwide will continue to head north given that retailers' sentiment remains fairly subdued and the ongoing challenges they face such as labour woes and reduced consumer spending at physical stores."

C&W's Ms Li is more upbeat, highlighting that some landlords are evolving with shoppers' changing needs.

Ms Tay of JLL also noted that some retailers such as Japanese fast fashion designer brand Miniso are continuing to concentrate on growing their outreach by opening more outlets. "And as landlords and retailers gather experience in navigating through this changing retail landscape to find winning formulas that resonate with consumers, there is potential for demand in retail space to strengthen and support a gradual tapering down of rental declines in 2018."

Ms Li expects retail rents to stabilise only after 2019 "when the supply pipeline has been depleted".

Source: Business Times, 29 Apr 2017

Rental gap between prime and suburban office space shrinks

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But it will likely widen again in 2018 as CBD rents climb, given the healthy take-up of new projects and reduced supply

THE gap between suburban and Grade A Central Business District office rentals has narrowed to 75 per cent as at the first quarter of 2017, the narrowest since Q4 2012, real estate agency Cushman & Wakefield reported on Tuesday.

Christine Li, director of research at Cushman & Wakefield, said that the narrowing rental gap would explain the reduced decentralisation activities in the market since 2015.

This is because CBD rental rates have been more attractive compared to suburban rates, and present a better value proposition for tenants.

However, the gap will likely widen again in 2018. The agency expects Grade A CBD rents to bottom out in 2017 and climb again in the next year, given the recent healthy take-up of new projects and a reduced supply after 2017.

The upcoming Marina One struck the largest deal of the quarter with Facebook's lease of 250,000 square feet of space, and the project now has a pre-commitment rate of more than 60 per cent.

At Frasers Tower, The Executive Centre's lease of 20,000 sq ft has raised the project's pre-commitment rate to 30 per cent.

The co-working sector is also gaining traction with the introduction of Chinese co-working operator Distrii to the Singapore market. The company currently occupies 60,000 sq ft in Republic Plaza 1.

Ms Li said: "Prime CBD Grade A office rental will be close to the tail end of the downcycle by the end of 2017, so once the prime CBD rents return to growth in 2018, we could see decentralisation activities picking up pace from 2018 onwards."

The injection of new supply in regional centres such as Paya Lebar and Woodlands will contribute to the wider gap predicted after 2017.

For instance, Paya Lebar Quarters, which has a net lettable area of approximately 883,000 sq ft, will be available in 2018.

The total incoming supply for 2017-2019 stands at 1.4 million sq ft.

Tenants who need not be in the CBD will have an easier time finding more affordable alternative space in the suburbs over the next two years, said Ms Li.

Depending on the location and quality of the decentralised office and business park space, they could enjoy rental savings ranging from 30 to 70 per cent.

Source: Business Times, 26 Apr 2017