Office and retail rentals reverse direction, head south in Q1

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Observers say office outlook still fairly positive for now, though retail segment still weak

RENTALS of office and retail space reversed direction to dip in the first three months of 2019, owing to uncertainties in the business outlook and continued woes in the retail sector.

Going by official figures from the Urban Redevelopment Authority (URA) on Friday, rentals in the central region of Singapore slipped by 0.6 per cent in the first quarter of 2019, in contrast with the increase of 0.5 per cent in the fourth quarter of 2018. This was the first quarterly drop since Q2 2017.

CBRE South-east Asia's head of research Desmond Sim said the correction in rentals could be due to the contrasting performances of good-quality office buildings in the core Central Business District (CBD) versus the older and less well-located offices.

Island-wide vacancy fell to 11.8 per cent, from 12.1 per cent at the end of the previous quarter, supported by net absorption of 19,000 sq m mainly taken up by technology firms and co-working operators.

Mr Sim said: "The office outlook remains fairly positive for now. With very decent pre-lease commitments already in place and a tapering supply pipeline, landlords' strong leverage is likely to be maintained."

Retail rentals in the central region, on the other hand, weakened by 0.2 per cent in the first quarter of this year, against the growth of 1.2 per cent in the previous quarter.

This essentially erased all the gains since the recent bottom in Q2 2018, noted Christine Li, head of research for Singapore and South-east Asia at Cushman & Wakefield. She said retail woes in the market do not seem to have blown over.

"The absorption of the island-wide retail space continues to lag supply. In Q1 2019, the amount of occupied retail space decreased by 14,000 sq m, although more space was also taken off the market with net supply reducing by 2,000 sq m during the quarter.

"The American diner chain Chili's closes all its branches in Singapore, while Crabtree & Evelyn is also shutting all but one store in a move to go online."

She added that retailers appear to be cautious about taking up spaces. "It does not help when the government announced in Budget 2019 that the dependency ratio ceiling for the services sector will be further tightened.

The move may cause some short-term pain and result in retailers holding back expansion plans in light of the anticipated labour crunch."

Island-wide vacancy rates have risen from 8.5 per cent in Q4 2018 to 8.7 per cent in Q1 2019.

On the price front, the official office price index rose 3 per cent for the first quarter - faster than the 2.4 per cent increase in the previous quarter, on the back of improved investment appetite for prime office assets, noted Tricia Song, head of research for Singapore at Colliers International.

En bloc transactions in the quarter included the sale of Manulife Centre, acquired by ARA Asset Management and British property group Chelsfield for S$555.5 million, and six levels at Suntec City reportedly sold to Alpha Investment Partners and another floor at the same property that was sold to an unnamed party.

"The punitive additional buyer's stamp duty measures on the residential sector since July 2018 should continue to fuel a shift in investor interest towards the commercial sector," she said.

The price index for retail space in the central region slumped 1.9 per cent in Q1, contrasting with the increase of 1.5 per cent in the previous quarter.

Source: Business Times, 8 May 2019