Office capital values down 2-3% in Q3

Source : Business Times - 9 Oct 2008

Easing of potential supply expected as 30% of projects have yet to start

OFFICE capital values fell 2-3 per cent quarter on quarter in the third quarter of this year in areas such as Marina Centre and Anson Road/Tanjong Pagar as demand softened, according to a report released yesterday.

The report by DTZ also points out that some redevelopment projects in the pipeline, such as International Factors Building, Robinson Tower and Marina House, have been deferred and the space put back in the market for leasing.

‘There could be more delays in completion, or easing of potential supply, as construction on about 30 per cent of projects in potential supply has not commenced,’ it says.

As the government’s ban on redeveloping office buildings in the central area for different uses will be lifted by end-2009, DTZ believes some planned office projects could be redeveloped for other purposes.

The cutback in potential supply comes as the financial sector, which has been largely responsible for the spike in demand for office space in the past two years, scales back expansion plans.

Many occupiers have shelved expansion plans amid economic uncertainty and are renewing leases at existing premises to avoid relocation costs, said DTZ executive director Cheng Siow Ying.

‘Office occupiers have become more cautious, with many adopting a wait-and-see approach,’ she said. ‘While negotiations for space are still going on, they are taking longer to conclude.’

Average office rents peaked in Q3, with no rental growth during the quarter. Although most landlords are maintaining their asking prices, they are now more flexible with lease packaging, resulting in lower effective rents.

Many tenants continue to relocate to cheaper decentralised offices and converted state properties, while those that qualify for hi-tech industrial and business parks are relocating there, Ms Cheng said. As a result, the island-wide average office occupancy rate eased 0.6 of a percentage point quarter on quarter to 96.3 per cent in Q3.

On the other hand, demand for industrial space, particularly in business parks, remained healthy. Business park occupancy averaged 92.5 per cent in Q3, up 2 percentage points from Q2.

DTZ says how far the office market will fall depends largely on how the global financial crisis plays out. There could be an increase in office sub-letting if companies start consolidating their operations and rationalising their use of space, it says.