Published November 21, 2008

Office space returns seen in year ahead

(SINGAPORE) Savills Singapore reckons that some 450,000 square feet of Grade A office space - or 3.5 per cent of existing space in this sector - could be returned by tenants in the next 12 months.

The financial upheaval in the US and Europe will inevitably lead to consolidation in the financial services industry that could lead to companies shedding excess space, the property consultancy firm said in a report yesterday. This space could make its way into the market either as tenants return it to landlords or try to sub-let it themselves.

Market watchers say that space released by existing tenants will exacerbate the supply glut that is expected to emerge, as almost nine million sq ft of Central Business District office space is completed over the next four years. Of this, at least 80 per cent will be Grade A.

In its report, Savills said that the average Grade A asking monthly rent in Singapore slipped 1.2 per cent quarter-on-quarter in Q3 2008 - the first decline in four years.

The figure fell from a high of $15.10 per square foot (psf) in Q2 this year to $14.92 psf in Q3.

The decline was on a 3.3 per cent drop in asking rent in Tanjong Pagar and a 0.91 per cent drop in the Orchard area. But asking rents held firm in Q3 for Raffles Place, City Hall/Marina Bay and Beach Road/Middle Road. And in Shenton Way, they actually rose 2.2 per cent.

'Many landlords have become more realistic in their asking rents, and are more open to incentives (for example, longer rent-free periods, free car-parking) to attract and retain quality tenants,' Savills said.

It predicts that Grade A office rents are likely to ease 5 to 10 per cent in Q4 this year and a further 15-20 per cent in 2009 as demand weakens.

The average Grade A office capital value slid 4.3 per cent quarter-on-quarter to $2,680 psf in Q3. This is the first drop in three years.