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Office rents up in Q2: URA

The office rental market continues to grow ahead of the retail and industrial property segments. 

SINGAPORE: The office rental market continues to grow ahead of the retail and industrial property segments. Latest data from the Urban Redevelopment Authority (URA) on Friday (July 25) shows that rentals of office space rose 2.8 per cent in the second quarter of 2014, compared with a 2.4 per cent increase in the first quarter. Analysts say they could climb by another 5 per cent in the second half of this year.

Office leasing activity remained steady through the second quarter. In particular, analysts say Grade A office buildings in the central business district have helped to spur rental growth. Island-wide vacancy rate of office space fell to 9.6 per cent, from 10 per cent in Q1.

"Singapore is home to about 7,000 MNCs, about one-third of them are using Singapore as a hub for the Asia Pacific,” said Donald Han, Managing Director of Chestertons. “A lot of the companies are using the first half of this year to ramp up operations - and that contributed to the growth of just over 2 per cent. Looking at where we are right now (in terms of office rents), we are probably about 10 per cent from the bottom of the market defined probably as middle of last year. And if you are looking at the peak rental, we are probably about 15 per cent before hitting the peak of early 2011.”

Chestertons expects office rentals to climb by a further 10 per cent in the next 12 months, before starting to moderate in 2016 when more than 4 million sq ft of new supply is expected to hit the market. Over in the retail space, rentals rose by 0.6 per cent in Q2, reversing a 0.3 per cent decline in the January-March period.

“It could be seasonal at this point in time with renewals, and some new leases came in with new products in the market, so it is inflationary increase,” said Mr Desmond Sim, Head of CBRE Research Singapore. “If the gross turnover sales turn to a direction that is very negative, then they (landlords) may be under a bit more pressure to tune down rent a bit.

Analysts say retail rents should stay relatively flat for the rest of the year as landlords would not want to risk pricing themselves out of the market. In addition, they expect landlords to continue to upgrade older malls in order to stay competitive.

The URA data also showed that island-wide retail space vacancy rate rose marginally to 5.9 per cent at the end of Q2 - up from 5.8 per cent in Q1 - as a result of an increase in retail space.

But analysts noted that several factors could pose a challenge for the retail sector. These include weaker retail sales, a stronger Singapore dollar and the tight labour market.

Industry watchers say it is the industrial segment that could face more challenges. The latest data released by JTC showed that industrial rentals fell 0.1 per cent on-quarter in Q2 2014. Analysts warn that demand for industrial space from SMEs may not keep pace with an anticipated growth in supply.

“There will be a lot of supply coming up in the next two to three years,” said Chesterton’s Mr Han. “We have got an imbalance in supply and demand, primarily because in the last two to three years, developers have been focused on building new high-grade specification projects targeted at the strata-tiled market. In view of the large supply coming on, we could see industrial rentals move downwards going forward."

Mr Sim echoed the sentiment. “Indicators like NODX are already not faring too well. At the same time, SMEs are also facing a foreign labour crunch,” he said. “The strength of the Singapore dollar could also deter export-driven manufacturing."

JTC's data also showed that all industrial property segments saw an increase in vacancy rates on a quarter-on-quarter basis with the exception of business parks in Q2. 

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