Dim property outlook for office and retail sectors

The property market might be displaying resilience amid a global economic slowdown, but experts say both the office and retail segments face weakness ahead.

Office space did better than expected in the three months to September. Vacancy rates fell and more space was leased than was vacated for a fourth straight quarter.

However, office rents are still falling and are set to come under further pressure, a report by property consultancy CBRE said. This is particularly so for older office buildings - such as One George Street, PWC Building and DBS Tower One - as space becomes available when existing tenants move to newer buildings, it added.

Stronger-than-expected occupier demand surprised analysts, but was not enough to halt rents from sliding further in the third quarter. The fall, however, happened at a slower pace.

Grade A office rents fell by 2.5 per cent to $9.80 per sq ft (psf) a month from the figure in the previous three months. They are down 10.9 per cent so far this year, CBRE said. Rental falls are expected to be minimal in the next quarter, with Grade A rents to reach support levels next year.

Grade B rents dipped a milder 0.6 per cent in the quarter, and 2.3 per cent in the first nine months of the year, to $7.17 psf a month.

"(But) the outlook for the Grade B market is expected to be less favourable in the next six months due to the impact of impending secondary or vacant stock and upcoming decentralised stock," the report said.

CBRE added that demand for space from financial institutions has stalled. This is the greatest drag on the market now and overshadows decent take-up from other industries. "Professional business services and legal sectors continue to be the main drivers of Central Business District (CBD) demand, but of late we have observed greater tenant diversification to include a toy manufacturer, Lego, and a nutrition company, Mead Johnson."

Next year, Asia Square Tower 2, with 782,280 sq ft of space, will be the only Grade A supply to come onstream in the CBD. The other major supply will come from two projects in outlying areas - The Metropolis in Buona Vista with 1.18 million sq ft, and the fully pre-leased Jem in Jurong with 315,390 sq ft.

"Strong appetite for decentralised projects remains, given the offer of lower occupation costs and improved proximity to established amenities and transport infrastructure," the report added.

On the retail front, rents held firm in the third quarter. Retail demand was mixed, with the withdrawal of Carrefour from Singapore juxtaposed against more new brand entrants and food and beverage outlets entering the market.

However, landlords were still able to hold up their asking rents this quarter, with flexibility extended to new market entrants and desired tenants. The landlords will monitor and review tenants' gross sales performance before making any rental revisions.

Average rents tracked by CBRE across all sub-markets were stable for the fourth straight quarter.

Prime Orchard Road rents held steady at $31.60 psf a month, while prime suburban rents were $29.75 psf a month.

But the outlook for the retail market is expected to weaken in the light of poor business sentiment, CBRE said, with market resilience expected to wane in the next six to 12 months.

"This is further exacerbated by the current labour crunch faced by the service industry," it added.

"While future supply remains as planned, the influx of surrendered space will put pressure on overall vacancy rates, especially with the closure of Carrefour as well as the relocation of Robinsons to The Heeren."

esthert@sph.com.sg