Office market improving with rents edging up

Demand for space returning, although huge supply will be onstream next year

(SINGAPORE) Sentiment in the commercial property sector is improving as leasing activity shows signs of growing in tandem with economic recovery.

A real estate consultancy has detected rising office rents in some parts of town in the past six weeks. And two research houses expect rents to rebound as much as 30 per cent by 2012.

In Singapore, 'office rents have a tendency to overshoot on the downside', CIMB analysts Donald Chua and Janice Ding said in a report last Thursday. 'However, past cycles also teach us that an office recovery can be surprisingly swift.'

According to Cushman & Wakefield's mid-second-quarter report, the monthly rent for Grade A buildings in Raffles Place averaged $7.53 per sq ft, up marginally from $7.52 psf in Q1.

And in the Shenton area, the average prime office rent edged up 1.6 per cent to $5.85 psf in Q2 from $5.76 psf in Q1.

Rents for top grade space at Raffles Place, City Hall and Orchard still dipped, but there is a 'glimmer of hope on the bottoming of prime rentals', according to Cushman & Wakefield.

Demand for space is returning, with companies absorbing about 90,000 sq ft in the past six weeks, it said. Reflecting this, the prime office vacancy rate slid 0.6 percentage points to 5.8 per cent.

Although things are looking up, Cushman & Wakefield has reservations on how soon a turnaround will kick in. So far, only rents for newer office buildings have risen, and a huge supply of space is coming on stream this year and next, it noted. 'To expect a robust recovery in overall CBD prime rents would be premature,' it said. But 'growth looks promising in the second half of the year'.

Also bullish are analysts from UOB Kay Hian and CIMB. Vikrant Pandey from the former expects a strong rebound in demand, which he reckons could lift prime office rents 10 per cent next year and 19 per cent in 2012.

Concerns about the large upcoming supply of office space are overstated, he said in a report this month. About 1.1 million sq ft of older office space could be converted into residences and after 2012, supply 'drops to near-zero levels', he said.

At the same time, existing companies and new businesses are seeking more space, Mr Pandey said, pointing out that more than 70 per cent of the upcoming supply of 2.7 million sq ft has been leased.

Analysts from CIMB said that historically, demand for office space has picked up in line with economic expansion. 'We believe this cycle is no different,' Mr Chua and Ms Ding said, noting that the government has raised its GDP growth forecast this year to 7-9 per cent.

In addition, office rents in Singapore have fallen below those in Hong Kong and the gap could widen further, increasing Singapore's relative attractiveness. 'Our base case suggests future demand can absorb supply and assumes a 30 per cent increase in office rents by 2012,' the CIMB analysts said.

Source: Business Times, 25 May 2010