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Subletting of excess space emerging as viable option for firms

Industry watchers say this will further depress office rents, which are already facing pressure as new office buildings are expected to be completed later this year.

SINGAPORE: Subletting of excess space seems to be emerging as a viable option for tenants to ease their rental burden, as they look to navigate a slowing economy.

With the latest spate of corporate downsizing by financial institutions, some companies may be giving up office space before their leases have expired. For these firms, they may - with the landlord's approval - look to sublet the space to another firm.

This practice of subletting is typically known as “shadow space”. And in a market already facing pressure from brand new supply coming on stream later this year, such as Guoco Tower, Marina One and Duo, analysts said that such subletting agreements are expected to drive rents down even more.

Mr Desmond Sim, head of research for Singapore and Southeast Asia at CBRE, explained: "Shadow space or secondary stock would put more pressure on rents, because there is the base rent which is already being signed in, so often there will some discount given to attract a sub-tenant to come in and take up this space. So there will be more pressure on the rent.

“On the landlord side, while they are still taking in this base rent, the pressure for them is when this lease of this shadow space expires; it becomes a primary vacancy, so that is also putting some pressure on landlords which want their space to be occupied or leased for the long term."

Given the depressed sentiments in the office market, potential tenants are in a stronger position to bargain as they will have the pick of where they would like to set up an office.

Experts said landlords will have to be innovative when looking for ways to convince tenants to sign leases.

Said Ms Christine Li, director of Singapore research at Cushman & Wakefield: "Landlords have to be very realistic when they negotiate a renewal, especially with the anchor tenants, because if you look at some of the banks, they can easily take up to one-third of the whole building. So in the event that the tenants decide to relocate, it will be difficult for the landlord to fill up that one-third.

“And landlords will have to settle probably for a smaller tenant or they will have to consider sub-dividing the floor space to accommodate multiple tenants."

Property consultancy CBRE estimates that between now and 2017, rents are expected to decline by between 18 and 20 per cent. However, it added that the sector could see a recovery in 2018, when new supply drops.