Overall office rentals across Singapore continued to slide under the pressure of oversupply and lacklustre demand, while in the retail scene, leasing activity slowed and the decline in retail rentals quickened in the third quarter of this year.

This was according to two separate reports by an international property consultancy on Monday, setting the tone for possibly sombre official data to be released by the Urban Redevelopment Authority (URA) this Friday.

According to the reports, rents in the Raffles Place/New Downtown area fell more sharply than before, in the third quarter compared to Q2. Monthly gross rents in the premium and Grade A office buildings fell 1.7 per cent and 1.5 per cent respectively, compared to the 1 per cent and 0.3 per cent quarter-on-quarter drop in Q2.

Rentals at Grade B office buildings in the city fringe and at Beach Road areas were harder hit, falling by 2.6 per cent and 2.4 per cent respectively over the previous quarter.

This was in part due to some key tenants such as MasterCard and Amadeus GDS Singapore vacating their offices at the Beach Road area, and moving to Duo Tower in Bugis and Guoco Tower at Tanjong Pagar respectively.

The property consultancy tracks rentals based on a basket of undisclosed properties, which it further breaks down into categories such as localities and office grades.

It also noted higher pre-commitment rates for upcoming projects such as Guoco Tower, Duo Tower and Marina One, which are completing in the next three quarters, at the expense of older prime buildings.

The firm said that they expect competition among landlords to fill the backfill spaces, especially in older office buildings, to intensify over the next few quarters. Demand is mainly characterised by relocations and flight to quality rather than expansions.

Backfill space is space that tenants will be vacating in time to come, but have not either because their existing leases are not up or their new premises are not ready.

As at Q3 2016, the pre-commitment level for Guoco Tower, which recently obtained its temporary occupation permit (TOP) in September, is reported to be at 80 per cent, while Duo Tower which extended its completion date to early 2017 has about 30 per cent pre-commitment level.

And while landlords have been offering greater incentives and lower rents to achieve higher occupancies, an increasing proportion of these leases offered in the market are trending towards shorter tenures.

A longer lease secured at current softened rents may effectively cap the potential rental upside when the office market picks up, it said. The consensus is that a recovery will be on the horizon in two to three years’ time.

In the retail sector URA’s rental records showed a total of 2,460 leasing deals in Q3, down 12.5 per cent quarter on quarter amid weak retail sentiment, manpower shortage and competition from e-commerce.

In Orchard Road, the average monthly gross rent for prime ground floor mall space contracted by 0.9 per cent from S$40.21 per sq ft (psf) in Q2 to S$39.86 psf in Q3.

Likewise, the rate of rental decline picked up pace in the regional centres. The average monthly gross rent for prime ground floor mall space reached S$33.38 psf after falling by 0.8 per cent in Q3.

Landlords are expected to remain flexible and realistic during rental negotiations, which could lead to a further softening in prime retail rents in in the fourth quarter, albeit at a slower pace.

In all, for the full year, premium and Grade A office rentals are expected to fall by 7-12 per cent, while ground-level retail rents could fall by 2-3 per cent altogether.

Adapted from: The Business Times, 25 October 2016

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