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Singapore office rentals collapse

SingaporeMarch 26, 2009 - Singapore office rents are in a deep decline, according to a new report issued by the widely respected researcher Cushman and Wakefield . The company argues that it is too early to forecast accurately when the trend will ease. 

 

The report says: “The global economic crisis has caught many firms off guard. Previously, companies eager to expand their presence in the pre-committed large spaces in Grade A office buildings.” 

 

The dramatic economic events of 2008 have produced a tough business environment. This has resulted in hesitation to relocate or expand as cost cutting and revenue generation is at the top of every CEO’s agenda. 

 

Cushman and Wakefield argues that the upside is that occupancy costs will decrease for those corporate tenants renewing or securing leases in the next few quarters. Even though office rents will decline sharply by about 30% to 40% in 2010, it will still be higher than previous peaks as prime office space commanded rent of about $7 per sq. ft. per month during 1995-97 and 2005-06 period. 

 

Prime office rent is expected to decline by 30% to 40% year on year from $12 per sq. ft. in 2009 to $8 per sq. ft. per month in 2010 and by a further 6% to $7.50 per sq. ft. per month by 2011. Signs of rental rate weakening are already evident from the landlords’ asking rents. At this point, forward rents that were pre-committed in 2007 or beginning 2008 will not be a good gauge into future rents as these were negotiated before both the Lehman Brothers collapse and worldwide government bail-out announcements. Average prime rent forecast for 2008 is approximately $14.80 per sq. ft. per month. 

 

“The fall should not come as a surprise as the Singapore government wanted to prevent rent from spiraling out of control that would force companies out of Singapore to lower cost cities. It is the magnitude of the fall, however, that will be more surprising. In our view, the three main factors contributing to the decrease in rental rates are:

 
  • Office stock increasing at a time when GDP growth stagnates or goes southwards. 
  • Huge office stock inventory build-up resulting from overwhelming optimism from developers in 2006 and 2007. 
  • Employment growth rate likely to drop to 0% to -1% as seen way back in 1998 and 2001-02.
 

The supply of office buildings usually lags behind the peak rental prices by two to three years owing to the length of time involved in the construction of new buildings. Looking at past trends, rentals reach the trough three years from the peak, as demonstrated in 1998 during the Asian Financial Crisis and in 2003, after the dot-com bubble. SARs was more of a coincidental occurrence rather than incidental to the rental fall in 2003. Prime office space commanded rent of about $7 per sq. ft. per month during 1995-97 and 2005-06 period. 

 

The Singapore office market will continue to plummet and probably plateau by 2010 in light of the severity of the economic crisis that is already occurring globally. The fact that Singapore is an international financial centre also means it will be badly hit during the downturn as a lot of investment activities is dependent on foreign participation. 

 

Prime office rental will hit about $7.50 per sq. ft. per month by 2011 when the vacancy rate of prime office buildings rises to about 11% to 15%. The main reason being a large supply coming onstream for a consecutive three years which might be difficult for the market to absorb, not to mention it happening during crisis period. A quick comparison of office rents across Asia shows that Singapore ranks fourth most expensive after Hong Kong, Tokyo and Mumbai. Occupancy cost in Singapore is still a good 30% lower than Hong Kong and Tokyo, which is good news to companies setting up regional headquarters here as Singapore is an even match to both Hong Kong and Tokyo in terms of infrastructure and accessibility.