Tag Archives: rents up

Office landlords in CBD call the shots amid crunch

The pendulum is swinging in favour of office landlords in the third quarter, with rents and capital values continuing to climb, said consultancy Colliers International yesterday.

It noted that most areas – called micro-markets – are experiencing a worsening supply squeeze that has generated occupancy rates of 95 per cent and kept rents rising for 18 months.

“The tight market has given landlords greater pricing power over tenants and we are seeing a growing divide between the type of spaces tenants desire in relation to affordability and landlords’ rental expectations,” said Mr Marcus Loo, the firm’s executive director of office services.

Raffles Place and New Downtown are the market’s red-hot zones.

Monthly rent for premium-grade offices shot up 6.1 per cent from the second quarter to the third to $11.67 per sq ft (psf) a month, the highest quarterly growth in three years, while Grade A office rents rose 2.9 per cent to $10.25 psf.

Rents for Grade A offices in other areas of the Central Business District (CBD) have expanded between 0.4 per cent and 2.9 per cent quarter on quarter and are heading for the “psychological rental benchmark level” of $10 psf a month, said Colliers.

Overall, the average occupancy rate for completed premium-grade and Grade A offices in the CBD has held firm during this quarter, at 96.5 per cent – the highest in six years.

The average occupancy rate is 97.2 per cent in Orchard Road, 97.8 per cent in the city fringe and 98.8 per cent in the suburbs.

While there were fewer transactions of strata-titled office units due to the Hungry Ghost Festival, the market for sales en bloc has been “bustling with activity” in this quarter.

Anson House in Tanjong Pagar sold for $172 million, Straits Trading Building in Battery Road reportedly went for $450 million and three levels of GB Building in Cecil Street sold for about $31.7 million in total.

The prices at these sales pushed up capital values, which are up 2.2 per cent for premium-grade offices and by 1.9 per cent for Grade A ones in the Raffles Place and New Downtown.

Ms Chia Siew Chuin, director of research and advisory at Colliers International, said rents of premium-grade office space in this zone are expected to grow close to 15 per cent for the full year, with rents in overall CBD grades A and B office space growing up to 10 per cent. She said capital values for premium and Grade A offices in Raffles Place and New Downtown will grow about 5 per cent this year.

The report also noted that more tenants have been asking for longer lease terms of, say, five years, with an option to extend for another five, or six-plus-six- year terms, with built-in rental review terms.

“(This) provides tenants with more stability and allows them to spread their asset depreciation for the longer period of time…

“However, longer lease terms do not generally equate to lower rents. Landlords may factor in potential rental upside if they are tied to a longer period of time,” said Mr Loo.


Office rents up in Q2

Sgbayhomes office


WHILE retail rentals have proved fairly flat so far this year, office rentals have been on a roll. They have already risen 5.2 per cent in the year to date, outpacing the 1.3 per cent full-year growth last year – and are likely to continue going up.

Analysts expect prime Central Business District (CBD) Grade A office rents to surge further by 7-15 per cent for the rest of the year, as tenants jostle for limited options amid a dearth of office space supply.

URA data released yesterday showed office rentals rising 2.8 per cent in the second quarter of this year – the highest quarterly growth in more than three years, and coming on the heels of a 2.4 per cent increase in Q1.

Rentals for offices in the Downtown Core (the CBD, City Hall, Bugis and Marina Centre zones) and the Orchard Planning Area registered a more pronounced increase of 3.2 per cent to a median S$10.03 per sq ft (psf) a month in Q2 – above the “psychological benchmark” of S$10 psf.

No office projects were completed in the CBD in the quarter, and there will be none soon as well – at least until CapitaGreen in Market Street is completed in December.

In fact, no CBD offices are expected to be ready until 2016, which is when three developments – Guoco Tower, Marina One, and Duo – come onstream. Not surprisingly then, vacancies fell from 10 per cent in Q1 to 9.6 per cent in Q2, and rents rose.

Savills Singapore research head Alan Cheong said: “During lease negotiations, the pendulum has swung in favour of landlords and caused signing rents to move closer to the asking rents.”

And tenants who seek smaller space tend to pay higher psf prices, partly also because they have less clout to bargain, he added.

This is all playing out against a backdrop of a global economy that has got on a more solid footing, creating a better business climate, which has in turn paved the way for more firms to ramp up growth plans, thus generating more demand for office space

R’ST Research’s director Ong Kah Seng said: “Office rents have been on a downward trend for the past two years post-financial crisis, so we are seeing some laggard rental recovery this year, in sync with the global economic recovery.”

Contrary to the upward trend in rents, however, the prices of office space – which is not so much a function of supply as it is a function of investment activity – stayed unchanged in Q2, following a 0.5 per cent increase in Q1.

CBRE research head Desmond Sim suggested that this could be because transactions in the quarter changed hands at market value, and so did not push up capital values.

Chia Siew Chuin, the director of research and advisory at Colliers, attributed this to a lack of new strata-titled office project launches in Q2.

Most office and retail space transactions tend to be of strata-titled units, rather than investment sales of a few floors or en bloc sales of entire buildings.

“The continued enforcement of the total debt servicing ratio (TDSR), which caps buyers’ loans, and concerns of an impending interest rate hike weigh on the ability of strata-titled office owners to significantly raise prices during the quarter,” Ms Chia said.

But she warned that the impending tightening in global liquidity could cause financial stress in open and trade-dependent markets like Singapore’s, and that some firms could hold back from expanding if rental costs accelerate at an unsustainable pace.

In retail space, rents rose by 0.6 per cent in Q2, after falling 0.3 per cent in Q1, so they essentially plateaued in the first half of 2014. URA’s index tracks base rents with gross turnover component for those to whom it is applicable.

Landlords may have become more careful with raising rents, now that they are under scrutiny; they also do not want to price themselves out of the market as retailers grow more resistant to rental increases, said CBRE’s Mr Sim.

Prices of retail space fell 0.3 per cent in Q2 after having stayed unchanged in Q1, similarly restrained by buyers’ loan restrictions.

“In the space of a year, the strata-titled retail sales market has had the wind dramatically taken out of its sails,” said Colliers’ Ms Chia.

Some 190 units changed hands in the first half, nowhere near the dramatic 642 transactions a year ago, pre-TDSR.

Most expect retail sales to stay flattish, or increase at inflationary levels at best, for the rest of 2014.

URA office and retail indices do not cover the whole island, but only 22 planning areas in the central area, including Downtown Core, Orchard, Marina East and South, and in fringe areas such as Newton, Outram, Bishan, Geylang and Queenstown.

Analysts like R’ST Research’s Mr Ong took issue with this, arguing that the suburban shopping sector was as active, if not more so, and that offices are decentralising and moving to locations outside the CBD. Much of the action in these two markets are not currently reflected in the data, he said.