Published April 8, 2008


Growth seen in Asia office rentals in '08

But analysts say some cities, including S'pore, may see slowing rental growth, reports UMA SHANKARI

BUOYED by limited office supply in some cities and high GDP growth, all major office markets in Asia are expected to see rental growths in 2008, but the pace of growth will vary from city to city, property analysts say.

Upside trend: Data from Cushman & Wakefield shows rents at Raffles Place in Singapore (above) have risen 100 per cent in the last year as against Hong Kong's 15 per cent. According to some reports, it is now more expensive to take up office space in Singapore than in Hong Kong

'Across the board, we still see positive demand for office markets across Asia,' said Megan Walters, director of research and business analytics for Asia Pacific at Cushman & Wakefield (C&W). 'But obviously the problems in the financial markets in the US have not been played out yet, and we have yet to see how it will affect investment markets in the region.'

The firm expects all offices markets in key cities across Asia to record increasing rents in 2008. However, about half the cities profiled - Singapore, Beijing, Shanghai, Chengdu, New Delhi, Mumbai, Kuala Lumpur and Bangkok - are expected to see slowing rental growth. The other cities - Hong Kong, Tokyo, Seoul, Taipei, Bangalore and Ho Chi Minh City - are still seeing accelerating rental growths.

Industry players here will perhaps be most interested in what is happening in Singapore and Hong Kong - long been seen as rivals in the region as a centre for international office services. The slowing rental growth in Singapore will be welcomed by many on the back of fears that the Singapore office market was overheating.

Rents here have been pushed up over the last few years mainly by expansion in the financial services sector owing to factors such as domestic growth, economic restructuring that resulted in the expansion of the service industries as well as the influx of both regional and global jobs into the market.

Rentals are not just climbing - they are climbing at a pace faster than ever seen before. Industry veterans have expressed fears that this could make Singapore less competitive compared with Hong Kong, where rents are rising at a more sedate pace.

For example, data from C&W shows that rents at Raffles Place in Singapore's Central Business District (CBD) have risen 100 per cent in the last year unlike Hong Kong's more moderate 15 per cent. And according to some reports, it is now more expensive to take up office space in Singapore than in Hong Kong.

Data released by Jones Lang LaSalle (JLL) yesterday shows that CBD core Grade A gross effective office rent in Singapore for the small space category (less than 10,000 square feet) stands at $17.35 per square foot per month (psf pm), up 8.4 per cent quarter on quarter from the $16.00 psf pm seen in Q4 2007. This is marginally higher than the quarterly rental growth of 7.4 per cent registered in Q4 2007, JLL said.

'In comparison with Hong Kong, the current gross effective rent of Grade A offices in Hong Kong Central - equivalent to Raffles Place in Singapore - stands at US$15.10 psf pm,' said JLL's report. 'This is some 21 per cent higher than Singapore's CBD core prime Grade A gross effective rental value of US$12.50 psf pm (or $17.35 psf pm).'

However, things should even out with more supply coming onstream in Singapore. Market watchers say that the rate of rental growth will slow and occupancy rates will fall this year. 'The growth in rental values is expected to moderate this year after a record increase in 2007,' said Cheng Siow Ying, DTZ Debenham Tie Leung's executive director.

Chris Archibold, head of commercial leasing at JLL, similarly noted that the rapid rental increase seen in Q1 2008 is mainly due to spillover demand.

He said: 'While Singapore office rental growth in Q1 2008 is some cause for optimism in this uncertain market condition, the increase in rental value is largely a spillover from the previous quarters.'

And a new report by DTZ says that islandwide office occupancy dipped in the first quarter of 2008, easing half a percentage point quarter on quarter to 97.1 per cent. The dip followed a 0.1 point drop in Q4 2007 from Q3.

The average occupancy of office buildings at Raffles Place dropped half a percentage point to 97.8 per cent in Q1, while that at Marina Centre rose 0.7 percentage point to 99.8 per cent.

DTZ attributed the slight dips in occupancy partly to two office buildings coming onstream. Together, The Central and VisionCrest Commercial added some 538,100 sq ft of new office space - raising islandwide office stock one per cent quarter on quarter to 56.6 million sq ft. Both buildings are not even fully leased yet.

Some occupiers are beginning to exercise caution in their medium-term leasing requirements, DTZ's Ms Cheng said. Going forward, the demand for CBD core office space in Singapore is expected to continue to be strong on the back of more demand from banks and financial institutions, many of which have set their sights on the burgeoning private wealth management in Asia.

But there will be some moderation for both rents and capital values. 'Although the financial and business sector is still expected to remain robust, the more modest economic growth projected will see companies limiting their expansion of office space requirements,' Knight Frank noted in a recent note. 'Some landlords would also be more accommodating of tenants in order to attract or retain these users of office space.'

And for the rest of Asia, a lot depends on how the sub-prime crisis in the US plays out, property analysts said. The region's investment markets - including for the office sector - are expected to emerge from the credit crunch better than their US or European counterparts.