International property consultant, Colliers International’s latest quarterly office property market research revealed that the Singapore office property market appeared to have averted an overheating situation – with office rents in 2Q 2011 maintaining at single-digit growth amid the continued easing of occupancy rate.

Average Monthly Gross Rents
Average monthly gross rents of islandwide Grade A office space recorded the third consecutive quarter of moderation in quarter-on-quarter (QoQ) growth at six per cent in 2Q 2011.

Specifically, average monthly gross rents of Grade A office space in the Raffles Place/New Downtown micro-market grew by seven per cent QoQ in 2Q 2011 to reach S$10.40 per sq ft per month.  This is slightly less than the eight-per-cent gain recorded in 1Q 2011.

The continued single-digit rental growth indicates an inclination towards moderation, which is a positive sign that the office property sector has averted an overheating situation in the current recovery cycle.  This also addresses concerns on the possibility of rents matching the previous peak achieved in 3Q 2008 in the short to medium term.

Mr Calvin Yeo (杨光伟), Executive Director of Office Services at Colliers International, says, “As of 2Q 2011, overall CBD Grade A office rents remains some 37.4 per cent below the peak of S$14.22 per sq ft per month achieved in 3Q 2008, while the average monthly gross rents of Grade A office space in the Raffles Place/New Downtown micro-market is still some 41.9 per cent off the S$17.89 per sq ft per month in 3Q 2008.”

Mr Yeo continues, “The release of the large amount of government land sites sold during the 2007/2008 market boom, which resulted in a strong pipeline of projects today to meet the wave of buoyant demand, has played a large part in bringing about this gentler recovery path.

Additionally, competition for tenants – given the normalization of demand amid rising supply of office space, as well as business park space as an alternative option for qualifying users – has helped to keep the rental growth of Grade A office space, specifically in the Raffles Place/New Downtown micro-market, in check.”

Average Occupancy Rate
The overall average occupancy rate for Grade A office space in the CBD continued to dip to 93.5 per cent in 2Q 2011, following its first correction in 1Q 2011 when it slipped 0.1 percentage point to 94.2 per cent.

The slip in occupancy rate was more pronounced in the Raffles Place/New Downtown and Beach Road micro-markets, where it fell 1.5 and 3.2 percentage points to 94.2 per cent and 90.6 per cent, respectively in 2Q 2011.

The relief in occupancy rates came about as occupiers’ initial enthusiasm for office space in response to Singapore’s strong economic turnaround from the global financial crisis subsided, and leasing activities returned to a more moderate level in 2Q 2011.

While flight to quality continued in 2Q 2011 – driven mainly by businesses in the financial services sector, such as Citic Bank International’s intended move to Asia Square Tower 1, it was taking place at a slower pace, which is also in line with the stabilization of expansion and consolidation plans of major large space users.

Furthermore, the widening gap in rental expectations – as a result of landlords continuing to raise asking rents to leverage the up-cycle in the office property market – has started to meet with some resistance from tenants, which, in turn, contributed to a moderation in the leasing exuberance.

Mr Yeo comments, “The current office market is experiencing a rising supply of space stemmed from the gradual completion of new office developments, as well as the impending secondary office space that would re-enter the market when tenants relocate to their pre-committed new premises.

Meanwhile, the mushrooming of new office and business park developments outside the CBD, which offers office-like specifications at comparatively-lower rents, has widened the option for qualifying office tenants and consequently, adds to the rising supply of space in the market.”

For instance, Mapletree Business City (MBC) located along Pasir Panjang Road has recently drawn Deutsche Bank and Nike as its new tenants, who have leased some 120,000 sq ft and 100,000 sq ft, respectively.

Average Capital Values
Although the office property sales market moderated in 2Q 2011, growth remained robust – supported by the continued prospect of rising office rents, a sustained low interest rate environment, as well as limited supply of saleable prime Grade A office space.  The move by sellers holding back the sale of such properties, in anticipation of price appreciation, further reduced their availability in the sales market.

The average capital value of Grade A office space in the Raffles Place/New Downtown micro-market rose 3.5 per cent QoQ to reach S$2,403 per sq ft in 2Q 2011, down from the hefty 11.2 per cent QoQ growth in 1Q 2011. Nonetheless, it is still some 14.6 per cent below its previous peak in 3Q 2008.

Ms Chia Siew Chuin (谢岫君), Director of Research & Advisory at Colliers International, says, “Looking forward, the office sector would continue to be supported by healthy demand drivers, particularly in the banking and professional services sectors, in which corporate hirings look set to remain on the growth trajectory due to Singapore’s established infrastructure and strategic location near emerging markets.

Given that Singapore is being identified as the second offshore yuan trade hub after Hong Kong, as well as concerted efforts to develop Singapore’s Islamic banking business, the Republic’s status as the largest forex trading centre in Asia outside of Japan will be greatly heightened.  These, coupled with the country moving towards to becoming a regional accounting hub, are expected to support a sustainable stream of demand for office space in Singapore.”

“Market optimism, however, could be tempered by the persistence of downside risks arising from the unresolved debt crisis in Europe, a slowdown in China’s economic growth, uncertainty of the US economic recovery, as well as the possible withdrawal effects of the ending of the second set of quantitative easing measures in June 2011 on the global economy.

Consequently, although rents are generally expected to remain on an uptrend, the growth in rents for Grade A office space in the CBD and the Raffles Place/New Downtown micro-market could cool off by not more than 8 per cent in 2H 2011, from 12.6 per cent and 15.6 per cent, respectively, in 1H 2011,”  concludes Ms Chia.