DTZ Holdings plc : Rents hold firm in Raffles Place despite fall in occupancy rate Singapore | 28 December, 2011

Occupancy rates in Raffles Place slid in 2011 as it was dealt the double whammy of substantial new supply and an outflow of demand to Marina Bay. Ocean Financial Centre, OUE Bayfront and One Raffles Place Tower 2 were completed in the year while major occupiers such as Standard Chartered Bank relocated to Marina Bay Financial Centre Tower 1 and Bank Julius Baer and Lloyd's of London moved to Asia Square Tower 1. The average occupancy rate for office space in Raffles Place fell 3.7 percentage points quarter-on-quarter (QOQ) and 7.6 percentage-points year-on-year (YOY) to 89.1% in Q4 2011.

Nevertheless, the average prime office rent in Raffles Place held firm at S$9.80 per sq ft per month in Q4 2011. For the whole of 2011, the average prime rent in the area rose at a slower pace of 8.9% compared to the 13.9% increase in 2010. Prime rents increased by 3.3% QOQ in Q1 2011 and 5.4% QOQ in Q2 2011 respectively but remained stagnant in the second half of 2011 due to occupier concerns over the worsening Eurozone debt crisis.

The average occupancy rate in Marina Centre also fell in the year as some of its occupiers such as Citibank moved to Marina Bay. The average occupancy rate fell 0.9 percentage-point QOQ and 2.4 percentage-points YOY to 96.3% in Q4 2011. The fall in occupancy rate in Marina Centre was smaller compared to Raffles Place as the decline in demand was mitigated by a lack of new supply in the area.

Rents in Marina Centre saw a fall of 1.6% QOQ to $9.25 per sq ft per month in Q4 2011 despite the smaller decline in office occupancy rate as there were more strata-titled offices held by individual investors. For 2011, rents in Marina Centre rose 15.6% YOY with the increase taking place in the first half of the year.

Ms Cheng Siow Ying, DTZ's Executive Director, Business Space noted: "Take-up of office space eased in 2011 following a host of major pre-commitment deals by multinationals in 2010. Office space leased this year was mainly from small and medium- sized companies. Many corporates chose to renew their leases or expand within the building to minimize fit-out and moving costs. Forward-looking expansion plans have been put on hold as occupiers adopt a wait-and-see stance in view of the uncertain economic environment. Although the market has turned quieter, we observed that some landlords in buildings with higher occupancies are holding onto the current rental rates while those with lower take-up rates are aggressively offering more attractive leasing incentives such as longer rent-free periods and tenant improvement contributions. In general, most landlords have become more flexible in packaging competitive lease terms to meet the occupiers' requirements."

The increase in supply for office space in 2012 is estimated to be about 1.1 million sq ft, less than half of the 2.4 million sq ft of increase in office space in 2011. A major office completion next year will be the Marina Bay Financial Centre Tower 3 which has more than half of its available space pre-committed.

While the lower increase in supply in 2012 will provide some respite to landlords, shadow space which represents excess office space that companies have leased but are looking to sublet or assign is noted to be on the rise. Approximately 187,000 sq ft of shadow space is currently available, almost double the estimated 102,000 sq ft of shadow space in Q3 2011. The majority of the shadow space (46%) is in the Marina Bay area as some companies put back excess space that was pre-committed earlier into the market. Raffles Place also has a significant share of shadow space (35%) as companies that have relocated to Marina Bay look for sub-tenants to occupy the vacated space.

Ms Chua Chor Hoon, Head of DTZ Asia Pacific Research, said: "As firms scale back on expansion plans and reduce headcount in the light of expected slower economic growth next year, office demand is expected to be weaker in 2012 which will place downward pressure on office rental values. We expect a moderate fall of less than 10% in rents, due to the smaller increase in supply in 2012."