Office rents continue to ease in the quarter but at a comparatively-moderated rate.

International property consultant, Colliers International’s latest quarterly research report revealed that capital values finally succumbed to the pressure from the continued easing in office rents in 2Q 2012 to record its first correction in 2.5 years.

The office property sector also witnessed a moderation in the decline of rents and a stable occupancy rate in the quarter.

Capital Values
The average capital values of Grade A office space in the Raffles Place/New Downtown micro-market softened by a marginal 0.5 per cent – from the S$2,459 per sq ft recorded in 1Q 2012 to S$2,447 per sq ft by end June 2012.

The soft leasing market and the continued easing of rents for the third consecutive quarter since 4Q 2011 – on the back of an increasingly-challenging global economic environment – have resulted in increased caution and lower price expectations among investors.

Nonetheless, driven by the low interest rate environment and continued availability of new strata supply, the office sector enjoyed sustained interest in the sales market during the quarter.

For example, 60 per cent of the 56 office units that were released for sale at Oxley Tower on Robinson Road were snapped up within the first few days of its launch in 2Q 2012, at prices ranging from S$2,800 per sq ft to S$3,490 per sq ft. EON Shenton also reportedly saw more than 30 office units sold out of the 50 units released during its preview at prices between S$2,150 per sq ft and S$3,000 per sq ft.

Meanwhile, en bloc sale of strata office units was also brisk in 2Q 2012.

In April 2012, 51 strata office units in Parkway Centre at Marine Parade Central were collectively sold for S$53.4 million, or about S$1,043 per sq ft. In the following month, 66 strata office units in Burlington Square at Bencoolen Street were sold for S$89.3 million or S$1,318 per sq ft.

The keen interest seen in the strata office market was underpinned by the inherent investment potential of such properties – not only are they, particularly that of quality and modern ones, limited in stock, strata office space also enjoy comparatively-high occupancy rates.

On the leasing market front, an increasingly-challenging global economic environment continued to hold back demand. The lacklustre leasing demand for office space put further downward pressure on rents, which saw another quarter of decline in 2Q 2012.

However, cushioned by a better-than-expected economic performance in Singapore, as well as the temporary relief from a hiatus of major new office completions for the rest of 2012, the rate of rental decline moderated in 2Q 2012, as compared to the previous quarter.

Rents of islandwide Grade A office space slipped by 1.2 per cent in 2Q 2012, compared to the 4.2 per cent fall in the preceding three months.

In the Raffles Place/New Downtown micro-market, the average monthly gross rents for Grade A office space fell three per cent on a quarter-on-quarter (QoQ) basis in 2Q 2012 to S$9.47 per sq ft. This is down from the 5.3 per cent QoQ drop in 1Q 2012.

Similarly, rents in other micro-markets moved by between 0 per cent and -2.4 per cent in 2Q 2012, which are less severe than the -2.3 per cent to -8.8 per cent plunge seen for 1Q 2012.

The modest rental decline in 2Q 2012 can be attributed to the relatively-firm stance adopted by some landlords towards rent expectations. Instead of lowering their rents, some landlords offered longer rent-free period, as well as more flexible lease terms.

The lower office rents could bode well for Singapore, since it would then improve the Republic’s competitive edge against other key cities in the region. In fact, companies in industries such as energy/commodities and private banking, among others, are seen taking the opportunity to secure office premises here at attractive rental levels.

Dubai Mercantile Exchange has announced plans to open an office in Singapore, its first outside the Emirate to facilitate trading of Oman crude futures. Singapore’s status as a growing private banking hub has also attracted firms such as Tata Capital, the financial arm of Indian multinational corporation, Tata Group, to use Singapore as a springboard to establish their private investment banking business in the region.

Additionally, demand for office space in the city fringe will be boosted by the growth of the private education industry. For instance, Kaplan is reportedly in advanced stages of negotiating a lease for about 90,000 sq ft of office space at Pomo along Selegie Road in the City Fringe micro-market to house its main campus.

Occupancy Rate
As cost is still a main concern to many firms during this time of uncertainty, the market saw few major new lease take-up in 2Q 2012. Moreover, further restructuring of the financial industry, since the latest escalation of the Euro zone debt crisis, has resulted in financial institutions streamlining functions; and thereby, optimising space efficiency.

Consequently, occupancy rates of office space remained stable in 2Q 2012.

The average Grade A office occupancy rate in the Raffles Place/New Downtown micro-market stood at 87.5 per cent in the quarter, which is relatively unchanged from the 87.2 per cent recorded in the March quarter.

Among the micro-markets, the Raffles Place/New Downtown micro-market reported the lowest average occupancy rate. This could be due to the cumulative effect of demand lagging behind supply over the past six months. Some 1.4 million sq ft of space is estimated to have been completed in the micro-market during the period, as compared to the corresponding space take-up of 1 million sq ft.

Looking forward, the overall demand for office space is foreseen to stay suppressed, given that the escalation of the Euro zone crisis will continue to restrict expansionary demand for financial institutions, which are traditionally the key demand driver for office space.

Mr Calvin Yeo(杨光伟), Executive Director of Office Services, Colliers International, says, “Notwithstanding the lack of major new completions for the rest of 2012, which is estimated at about 300,000 sq ft, the threat of an impending supply overhang remains. This stems from the substantial amount of space that could be returned to the market upon lease expiry, as existing tenants moved to newer premises. It is estimated that some 150,000 sq ft of space could be relinquished in 2H 2012.

If economic activities stay low, the quantum of shadow space available for sublease could also build up.”

Ms Chia Siew Chuin(谢岫君), Director of Research & Advisory, Colliers International concludes, “Consequently, office rental decline in the Raffles Place/New Downtown micro-market is expected to continue into the next six months of 2012 but the pace of decline could decelerate from the 8.1 per cent fall registered in the 1H 2012. Rental decline is expected to keep within 15 per cent for the entire year.

With weakening rents, capital values are also foreseen to continue on their moderate downward path, potentially eroding by five per cent for the whole year.”