Sweet deals to keep tenants from fleeing

Source : Business Times - 17 Apr 2009

Some landlords offering rents below $10 psf in choice locations to cling on to prized tenants

Commercial landlords are fighting to retain prized tenants, with some choice buildings in Raffles Place said to be offering even single-digit rental rates.

According to industry sources who declined to be named due to the sensitivity of deals, rents below $10 per square foot have popped up in lease renegotiations for buildings such as OUB Centre and Equity Plaza. Some tenants in Singapore Land Tower have also received offers of around $7 psf, they said.

Such asking rents in the heart of the business district would have been rare during the property boom. But with firms consolidating or holding back on growth after the financial crisis broke, office demand has ‘weakened considerably’, said DTZ in an April 1 report.

Also, ‘more shadow space is emerging as companies scale down their workspace and sublease excess space’ and this trend could continue, it said.

As recently as end- 2008, the average monthly rent for Grade A space was still $15 psf. This fell 18 per cent to $12.30 psf at the end of March, said CB Richard Ellis. In the same period, the average monthly rent for prime office space also dropped 19 per cent to $10.50 psf.

‘Competition to retain tenants is on,’ Cushman & Wakefield Singapore managing director Donald Han commented.

Few landlords responded when BT asked about rents in their buildings. One which did - CapitaCommercial Trust (CCT) - said that signing rents for its Grade A offices are in the double-digit range. The trust owns several properties such as Six Battery Road.

A Keppel Land spokeswoman said that there are ’single-digit rental rates for some buildings and double-digits for others’ across Keppel Land and K-Reit Asia’s office portfolios, which include Equity Plaza and a one-third interest in One Raffles Quay.

She added that the age and non-regular layout of Equity Plaza could have led to single-digit rentals in some cases, but the property did secure double-digit rates in January.

To be fair, sources said that rents under $10 psf are still under negotiation in many cases. ‘It doesn’t mean there have been transactions,’ one pointed out.

Also, industry observers believe that only some existing tenants can benefit from these rates - these would be firms renting large spaces, taking up long leases or those with good corporate profiles.

Still, the low rents offered are putting pressure on new projects hoping to draw tenants away, sources said. They now have to propose better deals to convince companies to bear the costs and hassle of relocation.

Cushman & Wakefield Singapore estimates that around 2.4 million square feet of office space will come onstream in 2009, with more arriving thereafter. Projects taking shape include the Marina Bay Financial Centre, which Keppel Land is developing with Hongkong Land and Cheung Kong (Holdings)/ Hutchison Whampoa.

There is already talk that asking rents at the upcoming Straits Trading Building (next to Singapore Land Tower) have reached single-digit levels. Reports in the effervescent days of January last year noted that the development could fetch rents of $18 psf.

The 28-storey building is expected to receive its temporary occupation permit (TOP) in November and around 25 per cent of space has been pre-committed. According to The Straits Trading Company, asking rents range from $10 to $12 psf depending on contract terms.

Of course, rents do not tell the whole story; landlords are also giving out other incentives to retain tenants. ‘We start to see more creative packaging of deals,’ said Knight Frank director of business space (office) Agnes Tay. ‘Some deals can involve a higher transaction price but include more rent-free months to bring down the average cost.’

A CCT spokesman also shared: ‘If tenants are prepared to renew for a longer term, we would be able to offer more rental concessions.

‘Tenants will also be able to save additional costs expected to be incurred if they relocate - namely, reinstatement cost for the existing space, fitting out of new premises, business disruption, moving costs, etc.’

Lower rents and more concessions will give businesses here some cost relief. As Savills noted in February, Grade A office rents in Singapore are likely to be about 20 per cent cheaper than in Hong Kong by end-2010.

As rents shot up here in 2006 and 2007, Grade A office rents actually surpassed those in Hong Kong in H2 2007 and early 2008. As an example of the rapid rise of the property market then, reports note that monthly rents at One Raffles Quay were once $4 psf when leasing began in 2004; they have since gone up severalfold.