Analysts say office rental slide a necessary correction

Prime office rents may be on a downward trend, but analysts say there is nothing much to worry about as the decline is a necessary correction.

An oversupply of office space and low demand has knocked down prime office rentals in the central business district (CBD).

Rents have fallen as much as 40 per cent since the beginning of 2008 but observers said that rents are not in a free fall. They said the slowdown in rental rates is a correction that was going to happen due to the unusually high prices resulting from the boom in 2007.

“We could see office rentals return to a 2005 level. Office rentals have risen to such a high rate, so we must not take it that the 2007 rates are the norm,” said Nicholas Mak, Independent Property Consultant.

“For example, it was quite common before 2005 to find that Raffles Place rentals could be under S$6 (per square foot per month) in some places,” he added.

Experts said that prices should level out at between S$6 and S$10 per square foot per month in the CBD over the next year. This is down from an average of S$15 in 2007 and 2008.

The oversupply of office space has also stalled the developments in the city. However, interest in affordable non-central locations for companies which do not need to be housed in the CBD, has resulted in new project interests outside of town.

Thor Kerr, managing director, BCI Asian Construction Information, said: “If you talk about huge projects like the Marina Bay area, probably not as many, there is just an over supply right now.

“But if you look at smaller projects, especially along the new MRT lines, that is going to be interesting because they have good infrastructure and have a competitive advantage because of pricing.”

Such projects include the new Fusionopolis Tower near Buona Vista, and mixed developments along South Beach Road.

According to observers, this interest in non-prime properties is likely to keep rents down for prime office space until the global economy recovers and big tenants are once again interested in the CBD.

Source: Channel News Asia, 19 Oct 2009