PDF versionSingapore, - After almost four years of robust rental growth, the Singapore office property market witnessed the first sign of market-wide rental softening in the third quarter of 2008. Although rentals were observed to be sliding, the decline was not drastic as lease renewal volume was observed to still be strong in the quarter and they were registered at healthy rental level.
Across the board, rentals of office space islandwide witnessed a drop in 3Q 2008 after growth was already
noticed to have eased for some areas in previous quarters. Specifically, the decline in rentals of Grade A offices
was the steepest in the Suntec/Marina/City Hall area where the rate of growth was registered at -6.2% quarteron-
quarter (qoq). The slowdown in rentals was followed by the Shenton Way/Robinson Road/Tanjong Pagar
areas, which also saw negative growth of -2.8% qoq. On the other hand, Grade A office rentals in the Raffles
Place area dropped the least by -1.4% qoq.
Grade B offices in Singapore also experienced downward pressure in rental in 3Q 2008. Grade B offices in
Orchard Road saw a reduction in rental growth by 7.8% qoq, the greatest fall for all Grade B office space
islandwide. Raffles Place and Shenton Way/Robinson Road/Tanjong Pagar Grade B offices however was less
impacted by the easing of office rentals and dipped by 1.8% qoq and 2.0% qoq respectively.
As a whole, offices in non-CBD locations also mirrored the general slowdown in rental in the third quarter.
Rentals continued to weaken for the Beach Road/Middle Road area from -0.9% qoq in 2Q 2008 to -3.4% qoq
this quarter. The suburban areas were similar in their fate when office rentals in all suburban areas saw declines
of between -1% to -8% qoq.
Although the growth in demand for office space islandwide appeared to be strong in the past three years with an
average absorption of about 500,000 sq ft every quarter, in reality, growth momentum may not necessarily be so
rosy, especially for offices in the Downtown Core. Although the prime Downtown Core area makes up about
40% of the total office stock in Singapore, it made up 60% of the increase in demand for office space between
2Q 2004 and end-2007, when rental growth was accelerating. Since 1Q 2008, there appears to be a crack in the
growth momentum as office demand in the Downtown Core area started to shrink, while overall islandwide
demand expanded. This however, was a consequence of external factors such as the global financial woes that
began in 2H 2007. Considering current heightened global financial setbacks, the tapering of rentals this quarter
as well as the slowdown in demand in the Downtown Core comes not as a surprise. The tenants in this area are
primarily financial institutions, many of which had already completed their expansion or consolidation plan over
last 24 months and some are adopting a more cautious approach by putting any further expansion plans on
hold.
After numerous quarters of rental growth, this decline in office rentals in the Raffles Place area can also be
partly attributed to the government’s efforts to increase the office supply. In addition, some landlords are
becoming more realistic and receptive in their rental expectation in order to attract tenants. They are also putting
more effort to retain tenants to maintain their buildings’ occupancy rates. These factors have in turn contributed
to the softening rentals.
In the short term, the beleaguered financial markets are expected to lead to many firms either postponing their expansion plan or consolidating their space usage. The possible financial mergers and acquisitions could also contribute to the consolidation of office usage and the reduction in demand for office space. We could also start to see the restructuring and freeing up of additional space and offer of 'sublease space' due to the cash flow problems faced by some of the companies. This would lead to an increase in available office space. As a result, average office rental is projected to continue to decrease by 14% to 19% in the next twelve months.
Nicholas Mak, Director of Consultancy & Research Department, Knight Frank, +65 6228 6821
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner Newmark Knight Frank operate from over 165 offices, in 36 countries, in six continents. For further information about the Company, please visit, please visit www.knightfrank.com