Tapping market indices to signal office rental swings

Source : Business Times - 23 Dec 2008

In Singapore as well as Hong Kong, stock market indices lead official office rental indices between two and five quarters before correction or recovery sets in, property consultancy DTZ observes in a report issued yesterday.

Office vacancy rates in these two Asian cities also led office rent correction and recovery by a few quarters. Guided by this finding, DTZ has developed an in-house early warning system to predict the probability of office markets in both cities entering correction or recovery phase within the next three to six months.

This will use the stock index and vacancy rate as leading predictors. These indicators are based on the probability concept and expressed in percentage terms.

Figures exceeding 50 per cent indicate that the probability of entering the correction phase in the next three to six months is high, and vice-versa.

As at end-Q3 2008, the Singapore office probability indicator reached 65 per cent while that of Hong Kong hit 63 per cent. ‘The risk reflected for Singapore matched the official pronouncement by the Urban Redevelopment Authority,’ DTZ says.

The URA office market rental index for Q4 2008 will be released only in late January.

DTZ, in its report, does not give latest Q4 office rents for Singapore.

However, BT reported recently that, according to latest estimates by rival property consulting group CB Richard Ellis, average Grade A and prime office rental values in Singapore have slipped about 20 per cent in the fourth quarter of this year over the preceding quarter - after rising steadily for nearly four years.

The rents for these two categories of office space peaked in Q3 this year. DTZ evaluated the quarterly movements of the STI against URA’s office market rental index as far back as 1993.

For Hong Kong, it mapped the official office rental index against the Hang Seng Index as far back as Q1 1997.

‘The results . . . clearly show that such a delayed effect is not a one-off event. It had occurred in the past during the Asian financial crisis in 1998 and the tech bubble crisis in 2001,’ DTZ says.

The Straits Times Index peaked at 3,900 points on Oct 10, 2007, while the Hang Seng Index peaked at 32,000 on Oct 30 last year, DTZ notes.