Singapore in for ‘biggest office space excess in 20 years’

Source : Straits Times - 30 Sep 2008

DEMAND for Singapore offices is likely to fall to recession-level lows next year and in 2010, resulting in the biggest excess supply of office space in 20 years, said Credit Suisse yesterday.

It expects office vacancy rates to hit a high of 16.5 per cent in 2010 - up from an islandwide vacancy of about 2 per cent currently - as firms’ expansion plans are hit by the global financial turbulence.

Office rentals are also predicted to peak earlier than expected this year, and fall 50 per cent by 2011, said research analyst Shirley Wong, who has downgraded the Singapore office trusts sector to underweight.

After her report was released, office trusts CapitaCommercial Trust (CCT) and Suntec Reit saw large drops in their unit prices that put them among the worst-performing property stocks yesterday. Property counters fell across the board as the wider stock market faltered.

CCT fell 17 cents to its lowest level in almost four years, while Wing Tai and Keppel Land each dropped more than 6 per cent to three-year lows.

‘Focus of the office sector has always been on supply, but actual demand is hurting, and repercussions from the US economic shocks could strain it further,’ Ms Wong said in the report. Tenants are resisting rent rises, while capital values have been flat for three quarters and vacancies have risen for two quarters.

But not all analysts are as bearish.

The supply of offices in the pipeline could be affected by construction delays, while property market sentiment and prices may start picking up at the end of next year when the integrated resorts take shape, said Kim Eng analyst Wilson Liew.

‘I do not foresee drastic cuts in the headcounts of financial institutions in the Asia-Pacific and, in fact, the private banking sector may provide some support.’

But Mr Liew conceded that the looming imbalance caused by more supply and less demand will ultimately lead to lower office rentals. He expects a moderate decline in rents of 10 to 15 per cent between now and the end of next year.

More broadly, property developers may soon be forced to write down their assets as real estate prices fall around the world, said another Credit Suisse research analyst in a separate report.

Developers were holding out for a recovery in sentiment, but ‘a confidence crisis from the recent near-collapse of global financial markets could hasten and steepen price falls’, said Ms Tricia Song.

Catalysts include the large upcoming supply of homes, a slower expatriate influx, potential job losses, and delays to the completion of the integrated resorts.

Ms Song noted that major write-downs in previous property downturns triggered developers’ stocks to plunge as much as 79 per cent in 1998 and up to 50 per cent in 2001.

‘CapitaLand and Keppel Land wrote down the most and could do so again due to aggressive acquisitions and revaluation gains in recent years,’ she added.

The only major property counters spared yesterday’s carnage were GuocoLand, up one cent at $1.85; CapitaMall Trust, up six cents at $2.31; and Bukit Sembawang, up 10 cents at $6.30.