Turning point for office market

 Turning point for office market

SINGAPORE - Among the major sectors of the local property market, the office sector had been seen as a pariah. The post-Lehman crisis redrew the financial landscape where deleveraging was the buzzword. Financial institutions were in no mood to expand, cost cuttings were deep and on top of that, the crisis triggered a series of flare-ups in the eurozone. As the supply of Grade A office buildings in the CBD increased with the completion of the new buildings in the Marina Bay area, vacancy levels started to rise. Consequently, by the law of demand and supply, rents began to decline, and had been doing so continuously since the second quarter of 2011.

The appetite for micro-strata units from small-time investors driven out of the residential market has maintained, if not, increased the rate per square foot paid for commercial property. This, in addition to a low interest rate environment has squeezed yields as capital values remained high, leading transaction volumes to decline as institutional buyers found it difficult to justify a purchase based on initial rental returns.

When the projected supply of CBD Grade A office space looked alarming, the fortunes of the office market started to reverse in Q1 2013 with rents surprisingly taking a strong rebound and rising 1.2 per cent quarter-on-quarter.

Although one can explain away the rental increase using the traditional argument of falling vacancy rates, observers are struggling to comprehend how this can be, when some 1.5 million sq ft of Grade A space in the CBD remains vacant. This is more than a year's average demand of 1.07 million sq ft in the past 10 years. If one looks islandwide, the total supply of office space from now till 2017 is expected to average 1.8 million sq ft per annum. This is significantly above the 10-year average islandwide net demand of 1.2 million sq ft per annum.

Doesn't this point to a market glut and so why then are rents and capital values rising?

There are a few possible reasons why and they are:

•A sizeable amount of the new supply is in the non-CBD region.

•The continued low interest rate environment

•Tactical short-term behaviour of the landlords

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