Published April 26, 2008

Office property prices edge up by just 1.1% in Q1

Growth slows as foreign investors leave the market, demand lower prices


OFFICE property prices took a hit in the first quarter of 2008, with foreign investors either withdrawing from the market or demanding lower prices.

According to data from the Urban Redevelopment Authority (URA), office property prices grew a marginal 1.1 per cent in Q1, compared with an 8 per cent increase in the previous quarter.

DTZ Debenham Tie Leung executive director (research and consultancy) Ong Choon Fah believes the office sector has been bolstered by foreign funds that have since been hurt by the global credit crunch, and that there are worries over impending new supply post-2010.

'Funding is now an issue,' she said. 'Investors are adopting a cautious approach.'

URA said that at end-Q1, a total of about 1.49 million square metres of gross floor area of office space was in the pipeline. This includes the new space from the redevelopment of former UIC Building (79,900 sq m) and the former SPI Building (32,000 sq m), both of which were granted planning approval for development in the quarter.

Cushman & Wakefield managing director Donald Han notes that price retreats from Q4 2007 to Q1 2008 could be due to lower prices achieved for 1 Phillip Street and potentially 1 George Street, which saw transactions at $2,500 psf and $2,600 psf respectively. Previous highs include Chevron House and Hitachi Tower at $2,700 psf and $2,900 psf respectively.

On the upside, overall office rents remained relatively stable in Q1, growing 7.3 per cent in Q1 compared with 10.9 per cent in the previous quarter.

'Yields will rise from 3.5-4 per cent per annum last year to 4.5-5 per cent per annum this year to compensate investors from the global financial market uncertainty,' Mr Han said.

'As such, we will see capital values stabilising this year, with moderated rental growth to provide the necessary yield uptick. We will see the emergence of Reits and owner occupiers as primary base investors.'

Knight Frank director (research and consultancy) Nicholas Mak believes one reason for the slower price and rental increases is that office tenants have become resistant to higher asking prices. He also noted some demand has been diverted to office space located outside the CBD.

URA also said a total of 435,000 sq m of business park space is in the pipeline from projects expected to be completed between the current Q2 and 2011.

The overall office vacancy rate rose marginally to 7.7 per cent in Q1, from 7.3 per cent in the preceding quarter. DTZ's Mrs Ong attributes this to office buildings being vacated for retrofitting or renovation.