Date: 23 January 2009

Analysis of 4Q 2008 Singapore Real Estate Statistics – Office sector

Singapore, - The Urban Redevelopment Authority (URA) released the Office real estate statistics for 4Q 2008 today.

The statistics have indicated that rents of office space in Singapore fell by a significant 6.5% qoq in 4Q 2008, compared to the first qoq fall over the past four years in 3Q 2008, of 0.8%. However, for the whole of 2008, office rents increased by 5.8%, in stark contrast against that of 2007 where rents climbed 56.1%. Similarly, prices of office space decreased 4.9% qoq in 4Q 2008, after dropping by 3.9% qoq in 3Q 2008. Although the decline has moderated, a continued price decrease of office space reflects there was limited investor interest for quality office buildings as the economic sentiments remained pessimistic. On the whole, prices of office space have fallen by 7.0%, and this can be seen as part of the corrections for a 32.6% price escalation in 2007.

The price and rental decline reflected an obvious softening in leasing interest. As such, islandwide office occupancy continued to dip by 0.6%-point, to 91.2% in 4Q 2008. The qoq drop in occupancy was more notable for office space in Downtown Core in 4Q 2008, by 1.5 percentage-points (to be 92.4%), while occupancy of office space Outside Central Region only fell 0.1 percentage-point (to be 88.5%). On a yearly basis, occupancy of office space in Downtown Core slid 2.6 percentage-points, while that Outside Central Region dropped by 1.6 percentage-points in 2008.

The rental index for office space in the Central Area thus fell more in 4Q 2008. It dropped 6.5% qoq in 4Q 2008, while that for office space in the Fringe Area dropped 5.9% qoq. This reverses the situation in 3Q 2008, where rents of office space in Fringe Area (2.4% qoq fall) dropped more than that in the Central Area (0.3% qoq fall), as there may be more choices of non-prime office space than prime office space. A more noticeable qoq fall of office space in Central Area indicates that rents of prime office space are increasingly under pressure, as a number of businesses, including established firms, are affected by the financial crisis. As such, tenants are resisting high rentals and are hesitant to commit or renew unless the offer terms are attractive. There are also some who are hoping to decentralize in order to cut down on business costs as business revenue has been severely reduced.

A larger fall in the rents of prime office rents can also be seen from a difference between the median
rents, based on either Lease Commencement or Contract Date. Median rentals of Category 1 office space based on Lease Commencement was $13 psf per moth in 4Q 2008, reflecting a 4.2% qoq decline. However, median rents of office space for leases of Category 1 office space based on Contract Date, (i.e. leases signed in 4Q 2008) dropped higher, by 9.8% qoq in 4Q 2008. This shows that occupiers of prime office space are now expecting lower occupancy costs. On the contrary, median rentals for Category 2 office space based on lease Commencement fell about 6.5% qoq while that based on Contract date dropped 6.3%.

Outlook

The performance of the office property market will continue to deteriorate, as economic conditions worsen and businesses have to strive to reduce operating costs. There may be some business closures, resulting in some office units being vacated.

However, the sombre economic conditions will encourage office space providers to be more understanding towards occupiers’ business concerns. There will be more room for negotiation, even for quality office buildings. Landlords will thus be more willing to retain existing tenants by renewing leases at lower rents, and offer more generous lease incentives such as longer rent-free periods, and this will result in lower rental income. If the offers are attractive, tenants will also prefer to remain to avoid relocation costs.

As a result of the negotiations, it is expected that prime office rentals is expected to slide by 15% to 20% in 1H 2009, while capital values of office space is expected to drop by 10-15% for the whole of 2009. The corrections of office rentals can be viewed as active measures by landlords to adjust to changing market conditions, which can help to raise the competitiveness of doing business in Singapore.