The Prospect Of More Future Supply Is Also A Consideration, Although The Time Lag Before Such Spaces Are Completed Will Still Place Constraints On Occupiers

Category: Finance, Real Estate.

In spite of recent uncertainties in the financial markets, there was no discernible dampening of demand for office space in Singapore.

While we foresee further upside to rentals, we expect that the pace of rental growth may ease going forward. Whilst demand remained broadbased with sectors such as energy, printing, IT, insurance and foreign law firms taking up office space in the third quarter, it was the financial and banking sector that continued to dominate as the potential source for large space requirements. The observed tenants increasing resistance to rental hikes while occupiers are more prepared to explore lower cost locations and alternative premises options such as business parks& hi- tech spaces. Prime office rent averaged$ 160 psf/ month, rising 17 per cent quarter- on- quarter and 86 per cent year- on- year. The prospect of more future supply is also a consideration, although the time lag before such spaces are completed will still place constraints on occupiers. Prime rents have exceeded the historical peak in 1990( $150 psf/ month) as well as our earlier forecast of$ 150 psf/ month for end- 200Grade A office rent averaged$ 190 psf/ month, reflecting an increase of 17 per cent quarter- on- quarter and 91 per cent year- on- year.

As at end- August, full potential supply( the aggregate from known private sector project supply, awarded GLS sites as well as potential supply from expected future land sales) amounted to 18 million square feet for 2007- 201 This reflects an increase of 147 per cent in absolute quantum, from the full potential supply of 4 million square feet that was identified two quarters ago at the end of March 200This works out to an average potential annual supply of 806 million square feet for the next six years, higher than the past ten- year average supply of 53 million square feet per annum. The government has reacted to escalating office costs and lack of expansion space by injecting more sites for sale under the 2H 2007 Government Land Sales( GLS) programme. The average projects annual take- up of 6 million square feet for 2007- 2012, even if full potential supply materalises, we forecast that there will be relative equilibrium between supply and take- up over this period and remain in the range of 90 per cent to 90 per cent. Notably, a fund linked to Goldman Sachs bought Chevron House from CapitaLand for$ 364 million( $2, 780 psf over NLA) , setting a new price benchmark- exceeding the rate of$ 2, 650 per square foot for One Finlayson Green. The office investment market remained active with some$ 459 billion worth of transactions chalked up during the third quarter. The average capital value for prime offices was estimated at$ 2, 900 per square foot in Q3 07, reflecting an increase of 10 per cent quarter- on- quarter and 118 per cent year- on- year.

As such, it may be timely for all in the sector- landlords, policy, tenants- makers- to take stock of the market dynamics in setting out policy and making decisions. Prime office yields were at 32 per cent up slightly from 23 per cent in Q2 0 On the supply side, the government s reaction has been measured so far, but care is required in monitoring any future change in demand for office space.

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