Singapore leasing activity shows signs of recovery

Singapore leasing activity shows signs of recovery
Dec 11, 2009 - PropertyGuru.com.sg

The Singapore office market has experienced some recovery since its dull start this year.

Although office rents are still expected to fall further in 2010, but at a much slower pace compared to the past 15 months, a recent unexpected rise of leasing activity has created speculation about office rents bottoming-out as early as mid-2010.

“We are currently witnessing a strong recovery in leasing activity. Some tenants are even starting to look at expansion,” says Moray Armstrong, executive director for office services at CB Richard Ellis.

Property consultants predict a return of positive demand in the Singapore office market to more than one million square feet in 2010, on the back of economic growth. However, with more than 2.7 million square feet of new space intended for completion next year, rents will continue to dip and vacancies will rise.

Older buildings with tenants transferring to new projects still face a challenging year ahead. Nevertheless, some anticipate the authorities to closely watch on the competitiveness of the Republic in office rents. Mr. Armstrong believes, “it is not unrealistic to foresee that the government may release a couple of prime office sites in the Marina Bay area in the second half next year.”

“A lot will hinge on how the office market performs in the next three months. The government wants to ensure the supply pipeline is healthy so that businesses feel confident about Singapore's ability to meet long-term demand for growth from headquarters and corporates.”

Chris Archibold, the head of markets and regional director of Jones Lang LaSalle, acknowledges “some talk in the market that office supply may become limited in 2013 and 2014 in the CBD Core.”

“The Singapore government is likely to continue monitoring the office market and inject supply into the market through the reserve list in anticipation of an upturn to avoid the supply crunch we saw in 2007,” he added.

The gross average monthly rental value of grade A office space has plummeted 7.95 percent quarter on quarter to $8.10 per sq ft in Q4 2009, as shown in the CBRE data. This is the lowest quarter-on-quarter dip since office rents started falling in the last quarter of 2008. The latest figure in the fourth quarter of 2009 reflects 46 percent decline for the whole of 2009 and 57 percent from the peak of $18.80 psf in the second and third quarter of 2008. CBRE estimates a further 13.6 percent contraction next year to hit $7 psf by end-2010.

The average grade A rental data of Colliers International for various CBD micromarkets shows a 1.9 percent quarter-on-quarter drop in Raffles Place/New Downtown and one percent in Bugis/ Beach Road in the fourth quarter of 2009, with rents unchanged in the Orchard Road, Shenton Way/Tanjong Pagar, City Hall/Marina Centre. For the whole of 2009, the declines ranged from 42 percent to 53 percent, but Colliers foretells rental declines to moderate 'within 5 percent' from January to June next year from current levels.

DTZ estimates a drop of 15 to 20 percent in the average monthly rental value for prime office space along the Raffles Place by 2010, which it says has dropped this year from $16 psf in Q4 2008 to $7.90 psf.

Mr. Armstrong expects rentals to stabilize by mid-2010 especially for better-quality buildings. According to Angela Tan, DTZ's SE Asia head of development and occupational markets, rents will likely bottom in 2011. “If the economy grows more strongly than expected, rents could bottom earlier in end-2010.”

The completion of recent projects creates a two-tier market. “Given the pick-up in leasing activity, we expect the bottom in rentals for new prime Grade A office buildings to be as close as H2 2010. However, there's likely to be longer downward pressure on rentals in existing prime Grade A office buildings as landlords seek to backfill vacancy caused by tenants relocating to new developments,” says Mr. Archibold of JLL.

On a brighter note, Mr. Armstrong of CBRE says he has already seen some of the resurgence in leasing activity fuelled by expansion and not just replacement needs. This will serve as the foundation for a more positive take-up.