Office rental decline accelerates

20160423-bt-office-rental-decline-accelerates THE Urban Redevelopment Authority's (URA) index for office rentals in Singapore eased 2.1 per cent quarter-on-quarter in the first quarter of this year - a steeper drop compared with the 1.8 per cent decline in Q4 last year.

From its recent peak in Q1 2015, the index has corrected 9 per cent.

URA's price index for office space dipped 0.3 per cent in Q1 2016 after easing 0.1 per cent in the previous quarter.

As at the end of Q1 2016, there was a total pipeline supply of slightly more than one million square metres of gross floor area of office space.

The islandwide vacancy rate for offices dipped to 9.2 per cent as at the end of Q1 2016 from 9.5 per cent as at end-Q4 2015. URA said the amount of occupied office space rose by 1,000 sq m (net) in the first quarter - contrasting with the decrease of 10,000 sq m (net) in the previous quarter. On the other hand, the stock of office space shrank by 23,000 sq m (net) in Q1 2016 - a bigger drop than the decrease of 21,000 sq m (net) in the previous quarter.

However, property consultants expect vacancy rates to soar in the coming quarters given the huge level of office completions. Cushman & Wakefield's research director Christine Li expects the figure to surge past double-digit levels by year-end.

Colliers International, making reference to its office baskets, said it expects the average vacancy levels of Premium and Grade A office buildings to rise above 15 per cent from the second half of this year to early next year, when about 4 million sq ft of office space is slated to be completed in projects such as Guoco Tower, Duo Tower and Marina One, amid a cautious business outlook. In Q1 this year, the vacancy figure for the basket was 6.9 per cent.

Commenting on the profile of office leasing deals, CBRE Research's head of Singapore and South-east Asia Desmond Sim said: "At this point in the cycle, relocation is primarily being driven by 'flight to quality' and efficiency gains rather than expansion."

JLL too observed that global headwinds have intensified in the past three months, further dampening business sentiment and resulting in businesses becoming increasingly cautious about their real estate plans.

"Coupled with the large impending supply, landlords are facing greater pressure to lower rents in this tenant-favourable market in order to maintain occupancy. Some have also been observed to be renewing tenants ahead of normal schedule and offering longer fitting-out periods to entice new tenants," it added.

JLL forecasts that URA's office rental index will fall 10-15 per cent for the whole of this year.

Anthea To, senior associate director of research and advisory at Colliers, said downward pressure on rents in Premium and Grade A office buildings is likely to persist with projected declines of 3-5 per cent per quarter until the end of 2016. "So we're looking at a minimum full-year rent drop of 10 per cent."

Source: Business Times, 23 Apr 2016