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