http://www.businesstimes.com.sg/real...-dips-26-in-q2

Central Region office rent index dips 2.6% in Q2

URA's Central Region retail rental index slips 0.5% after easing 0.3% in Q1

By Kalpana Rashiwala

[email protected]@KalpanaBT

Jul 25, 2015


THE Urban Redevelopment Authority's Central Region office rental index slid 2.6 per cent quarter on quarter in the second quarter of this year, the first drop after eight consecutive quarterly increases. In Q1, the index had appreciated 0.6 per cent.

The Q2 fall was the steepest drop in the index since the 3.3 per cent decline in Q4 2009, according to Cushman & Wakefield research director Christine Li. "The moderation may be attributed to Singapore's lacklustre second quarter GDP growth and supply overhang of nearly four million sq ft of prime office space scheduled for completion in 2016."

Another source of rental weakness, she noted, is "the government's restrictive foreign labour policy with office-using employment increasing by a mere 2,700 workers in the first quarter - the lowest level since Q1 2009 during the global financial crisis".

Nevertheless, the net increase in office demand or amount of occupied office space doubled to 38,000 square metres (409,028 sq ft) in Q2 from 19,000 sq m in Q1. This takes the figure for the first-half to 57,000 sq m (613,542 sq ft). The figure for the whole of last year was 775,000 sq ft.

The steady absorption of office space in Q2 was amid tight office supply completion this year. URA's islandwide office vacancy rate dipped to 9.8 per cent at end-Q2 from 10.2 per cent at end-Q1. That said, broad weakness in the office leasing market along with record supply is expected to sharply push up vacancy rates in 2016, Ms Li predicted.

Savills' average gross effective monthly rental value for AAA office space for lettings of up to 5,000 sq ft slipped 7.4 per cent to S$12.58 psf in Q2 from S$13.59 psf in Q1.

For its overall CBD Grade A basket - comprising A, AA and AAA grades of office space - the average monthly rental value fell 2.1 per cent quarter on quarter to S$9.70 psf in Q2.

"The road ahead will be challenging for this market as some large tenants like financial institutions continue to downsize their real estate footprint," said Alan Cheong, research head at Savills Singapore. Although tenants are moving from older buildings to newer ones and increasing their net space taken up, it would not be enough to counter the new supply, secondary and shadow space that will enter the market in the coming two years, he suggested.

"Whilst face rents may yield slightly to the downside, the much more opaque net effective rent (which factors in incentives given by landlords), could adjust more. We also believe that rents for Grade A offices for lettings 20,000 sq ft or more would be more affected than smaller-space lettings."

URA's Central Region office price index rose 0.3 per cent quarter on quarter in Q2, compared to a drop of 0.1 per cent in Q1.

Ms Li said that weak economic growth coupled with a persistent rent decline over the next six quarters could result in "some degree of price moderation in the near future".

URA's price index for retail space in the Central Region fell 0.5 per cent in Q2, after remaining unchanged in Q1. Its Central Region retail rental index dropped 0.5 per cent in Q2 after easing 0.3 per cent in Q1.

Islandwide, the vacancy rate of retail space rose to 7.2 per cent at end-Q2 from 6.8 per cent at end-Q1. "Demand for space from retailers has been impacted by a slowing economy, rising cost of business, difficulty in hiring due to policy restrictions and a fall in tourist arrivals," noted JLL national director Ong Teck Hui. Ms Li of Cushman forecast that "in the year ahead, rents of prime space, particularly in Orchard Road and city fringe areas, are expected to come under pressure due to increasing labour costs and weakening demand arising from falling tourist arrival numbers".