The large pipeline of approximately 11 million sq ft of office space could put downward pressure on rents.

According to the latest quarterly research conducted by international property consultant, Colliers International, Singapore’s office property leasing market in 4Q 2011 has buckled under the strain of heightened uncertainties and volatility, arising from the debt crisis in the Eurozone.

On the other hand, the sales market enjoyed a flurry of activities in the quarter, underpinned by new launches of strata-titled office projects and the continued low interest rate environment.

In 4Q 2011, overall Central Business District (CBD) Grade A office rents declined by 1.6 per cent quarter-on-quarter (QoQ) to average at S$8.93 per sq ft per month.

For the first time since the market bottomed out in 4Q 2009, the average monthly gross rents for Grade A office space in the Raffles Place/New Downtown micro-market fell by 4.3 per cent QoQ in 4Q 2011, to S$10.31 per sq ft per month. This brought the whole year’s gain to 14.6 per cent for the micro-market, which is a sharp moderation from the 31.4 per cent growth rate recorded in 2010.

Meanwhile, rents in two other Grade A micro-markets also saw corrections in 4Q 2011, with rents in the Marina/City Hall micro-market retreating by 2.3 per cent QoQ, and the Beach Road micro-market edging down by 0.8 per cent QoQ.

Occupancy Rates
For the first time since 3Q 2005, occupancy rate in the Raffles Place/New Downtown micro-market fell below 90 per cent in 4Q 2011 – easing to 88 per cent from 90.9 per cent in 3Q 2011. The drop in the occupancy rate was due to the completion of some 350,000 sq ft of space in the area in the quarter.

The increase in office stock was not met with corresponding new occupier demand, as many firms – including major financial institutions and accounting firms – have turned cautious towards expansion plans – on the back of the weak global investment climate and growing financial volatility caused by the worsening Eurozone debt crisis, as well as a slowing Chinese economy. Together, they have dampened sentiment-sensitive activities within the business and financial services sectors in Singapore in 4Q 2011.

Mr Calvin Yeo (杨光伟) ,Executive Director of Office Services, Colliers International, says, “The demand and supply equilibrium is further tipped with more office tenants relocating or locating some of their operations – including regional functions, back offices and business continuity premises – out of the Central Business District. These moves are facilitated by the availability of compelling sub-urban options in the form of new office and business park developments, which have specifications and amenities similar to Grade A office buildings in the CBD.

For example, Samsung Asia has reportedly taken up about 80,000 sq ft of business park space at Mapletree Business City and is vacating from their 50,000 sq ft office premises at Samsung Hub in the Raffles Place/New Downtown micro-market.”

Capital Values
Notwithstanding the lacklustre performance in the leasing market, there was a flurry of activities in both the office strata-title and en bloc investment sales markets in 4Q 2011.

In the strata-title sales market, investor interest was boosted by the hype created from the launch of two new strata-titled office projects – Paya Lebar Square and Robinson Square.

Demand for strata-titled offices was largely driven by the low interest rate environment, as well as business occupiers who prefer more control over their premises after being displaced or who will be displaced from their existing locations, as their office buildings are being torn down for re-development.

Meanwhile, the investment sales market was supported by investors hunting for opportunistic purchases before the year came to a close.

The largest deal in terms of quantum price in the quarter, and also in five years, was K-Reit Asia’s S$2.01 billion purchase of Keppel Land’s stake of 87.5 per cent for a 99-year leasehold tenure in the 885,000-sq ft Ocean Financial Centre. At S$2,600 per sq ft, after accounting for rental support of up to S$170 million from the completion of the sale to the end of 2016, it is a new high for an office investment deal since the global financial crisis three years ago. The previous high was S$2,524 per sq ft achieved for the freehold One Finlayson Green in March 2011.

Healthy buying momentum in the sales market enabled capital values to hold stable in 4Q 2011, despite the softening rental market.

The average capital value of Grade A office space in the Raffles Place/New Downtown micro-market for 4Q 2011 was S$2,459 per sq ft, relatively unchanged from the S$2,460 per sq ft recorded in 3Q 2011. However, it is still some 12.6 per cent below its previous peak of S$2,814 sq ft in 3Q 2008.

For the whole of 2011, the average capital value of Grade A office space in the Raffles Place/New Downtown micro-market grew by a total of 17.8 per cent.

In light of the gloomier outlook due to the Eurozone’s debt crisis, many firms, including major financial institutions, are expected to continue to rein in their short-term expansion and hiring plans, while reducing headcounts in poor-performing and non-essential fields.

This could further impact occupier demand for office space. Consequently, the stock of shadow space could climb in 2012, should tenants look to sub-let their excess space.

Ms Chia Siew Chuin (谢岫君), Director of Research & Advisory, Colliers International, says, “The large pipeline of office space supply coming on stream from 2012 to 2016 is of concern. The future supply of islandwide office space is forecast to amount to close to 11 million sq ft, which translates to an average 2.2 million sq ft per annum.

This is approximately 69.2 per cent higher than the annual average net new supply of 1.3 million sq ft in the last five years from 2006 to 2010, and 83.3 per cent higher than the historical take-up rate of about 1.2 million sq ft over the same period. Consequently, this could place some downward pressure on rents, as occupancy levels could ease when new office developments are completed.”

Nonetheless, there is still some support for the office property market.

Although most companies have put on hold their expansion plans, many are expected to continue to maintain their presence in Singapore, as Asia is the current growth region. Meanwhile, demand by government institutions and businesses to upgrade to better quality buildings will also help to shore up part of the demand for office space that was previously driven by the financial institutions.

Mr Yeo says, “Generally, new office developments are expected to hold out better than existing developments in the forthcoming downturn. The preference for new outfits would likely generate a fresh wave of flight to quality triggered by the easing of office rents. Companies that continue to do well despite possible economic downturn can be expected to take advantage of the competitive rental rates to gain a foothold in new office developments. Occupancy rates of such buildings and rents will, hence, be supported.

The concern should be for secondary office space, which would be vacated and returned by tenants moving to new office buildings. This segment would suffer deeper cuts in rents, if new demand does not pick up.”

For the sales market, some investors are reportedly looking for value deals, despite the uncertain economic outlook. The recent fifth set of government measures to cool the residential market could also divert some investors’ interest to strata-titled office properties.

Ms Chia concludes, “Going forward, although Singapore’s office rents and capital values look set to soften from current levels, the magnitude of decline is expected to be tamer, compared to the previous crisis. Office rents and capital values are forecast to decline by about 10 per cent to 15 per cent in 2012, as compared to a 20 to 50 per cent correction seen in the first year of the global financial crisis-led decline in 2009.”