Likelihood of 2nd Lehman-like doomsday hurts office rents

Prime office rents are seen to contract by 9.9% in FY12 as businesses hold off leasing plans.

In a statement, DMG Research said that office leasing in 2H11, which experienced a boom in FY10, is likely to experience a slowdown on the back of cautious economic outlook and muted demand from the banks.

"With a potential advent of another 'Lehman-like' crisis, there is a possibility for Singapore office sector...  to be affected by recent economic developments in US and Europe," the analyst said.

Investment sales have already taken a dip, with bidding for the Robinson Road/Cecil Street office site tender receiving muted response from prospective tenants.

The offer for a prime office site garnered only three bids, which DMG Research said is reflective of the current cautious stance by developers on office sector.

The analyst said the recent uncertainty in the financial markets have turned large office leasing deals seen in FY10 a thing of the past, with banks currently quiet on the leasing front.

“While there are some bright spots... [an example of which is] Rio Tinto taking up 3 floors of office space at MBFC Tower 3 (Phase 2) c.70,000 sqf, we think the slowdown in demand for office space in the financial sector is likely to lead to spillover effect in terms of contraction in other service sectors such as law firms,” the research firm said.

According to takeaways from market players, the level of inquiries for office space has slowed in Q211 on the backdrop of events panning out in US and Europe.

Rents have recently shown signs of moderation in growth, inching just 1.5% in Q211 versus 5.4% in the first quarter.

According to CBRE, it is estimated that there will be c.7.4m sf of office supply coming on-stream till FY15 which will impact vacancy rate and subsequent dampener on rents.

Barring the scenario of another severe global recession, DMG Research has forecast prime office rents to contract from $9.10 in FY11 to c.$8.20 in FY12.