Published September 25, 2012

Central office rents down, fringe areas holding firm

The dual-speed trend is likely to continue for the next 6-12 months

By Kalpana Rashiwala

[SINGAPORE] A two-speed movement in office rentals in Singapore's Central Business District and in the CBD-fringe areas has emerged, going by the third quarter office rental figures from DTZ.

In CBD locations such as Marina Bay and Shenton Way, gross average monthly rentals fell roughly 4 per cent or more in Q3 over the preceding quarter.

Further out, in addresses such as Marina Centre (including Suntec City and Millennia and Centennial towers), North Bridge Road/Beach Road, Bras Basah and Orchard Road, rents held pretty firm.

This dual-speed trend is likely to continue for the next six to 12 months, predicts DTZ's head of Asia-Pacific Research Chua Chor Hoon.

One reason is that the fringe locations have a more diversified tenant profile; this is unlike the tenant profile in Raffles Place and Marina Bay, where more than half the occupiers are in banking and finance, the sector feeling the most heat from the ongoing debt crisis in Europe.

Another reason is that the supply of new offices is much tighter in the fringe areas than in the CBD, she says.

DTZ estimates that 70 per cent (170,000 sq ft) of the estimated 240,000 sq ft of shadow space - excess space made available for subletting or reassignment by existing tenants - is in Marina Bay and Raffles Place.

Jones Lang LaSalle (JLL) said in a statement yesterday that office demand was fairly muted in Q3, with leasing transactions in the core CBD area largely supported by smaller tenants.

"Some larger office tenants are currently focused on exploring their options in decentralising business operations to save costs; quite a number are adopting a wait-and-see approach due to concerns over the economic situation in Europe."

JLL's head of markets, Chris Archibold, reckons the net increase in office take-up for the second-half of the year will be lower than in the first half.

Based on Urban Redevelopment Authority's figures, the net increase in islandwide office space demand was 570,487 sq ft for Q1 2012, and 355,209 sq ft for Q2.

JLL's South-East Asia research head Chua Yang Liang projects around 323,000 sq ft for Q3 and 258,000 sq ft in Q4 - totalling around 1.5 million sq ft for the full year.

This would be a drop from last year's 2.3 million sq ft net increase in office take-up.

New office completion is projected to rise from around 1.7 million sq ft this year to 2.4 million sq ft next year. Mr Archibold says: "Assuming the global economy keeps going in the direction it has been going - that is, more quantitative easing to try and fix economic issues - we can expect rental levels to be fairly flat and demand to be average next year. A lot will depend on what happens in Europe."

JLL's average gross effective monthly rental value for Grade A office space in Raffles Place (excluding Marina Bay) dipped 1.1 per cent Q-on-Q to $9.10 psf in Q3, matching the drop in Q2.

The Q3 figure is down 10.8 per cent from $10.20 psf in Q3 2011, which was also the recent peak.

"My guess is that Q4 2012 will be pretty flat or down one to 2 per cent (from Q3), so we could end 2012 at about $8.90 or $9 psf," says Mr Archibold.

JLL also says that average rents in the Shenton Way and Marina Centre submarkets posted moderate declines of 0.8 per cent and 1.3 per cent Q-on-Q respectively in Q3 - against decreases of 1.6 per cent and 1.9 per cent in Q2. "These numbers point to relatively stable market conditions," it adds.

DTZ's statement focused on the divergence in the speed of rental movements between the CBD and fringe locations. Average gross face rents in Marina Bay fell the most by 4.4 per cent Q-on-Q to $10.75 psf in Q3.

In the year to date, the drop has been 10 per cent - due to the completion of large buildings every year since 2010.

The occupancy rate in Marina Bay is the lowest among all areas, at 83 per cent.

In the traditional Raffles Place financial district, new buildings with similar specifications as those in Marina Bay also logged a 4.3 per cent Q-on-Q rental decline to an average of $11 psf a month in Q3.

This rental level is actually higher than Marina Bay's, because of a higher occupancy rate of 92.7 per cent. For the rest of Raffles Place, however, average monthly gross face rents dipped a smaller 1.3 per cent Q-on-Q to $9.38 psf in Q3. "The slower rate of decline is due to occupiers preferring to renew leases to reduce relocation costs or to expand into vacated space in the same building," DTZ says.

Elsewhere in the CBD, the average monthly rental in Shenton Way, Robinson Road and Cecil Street slipped 4 per cent Q-on-Q to $7.25 psf in Q3, with occupancy sliding 5.3 percentage points Q-on-Q to 90 per cent, chiefly because of DBS moving out of DBS Building to its new home in the Marina Bay Financial Centre's Tower 3.

In CBD-fringe areas, rents, holding firm in Q3, stood at $9.15 psf in Marina Centre, where occupancy was near full at 99.4 per cent. In Anson Road/Tanjong Pagar, the average monthly rent stood at $7.50 psf for the fourth consecutive quarter. Demand has been supported by displaced tenants in the likes of UIC Building along Shenton Way and Chow House in Robinson Road, which have been torn down for redevelopment.

Monthly rents in other CBD fringe areas such as Orchard Road, Beach Road/North Bridge Road and Bras Basah/Selegie Road also held firm at $8.60 psf, $6.90 psf and $6.15 psf respectively in Q3.