Office rentals to fall up to 6% in 2013

Will it bottom out anytime soon?

According to UOB Kay Hian, rentals are expected to fall 4-6 % over the next 2-3 quarters before bottoming out. This follows a 13.5% yoy fall in Grade-A office rentals in 2012 to S$9.51psf pm. Given that Grade-B CBD office rentals had fallen 3.3% to S$7.60psf pm in 9M12, the differential between Grade-B and Grade-A office rentals had reached a 3-year low at 28.9% in 3Q12 from 53.6% in 1Q07.

Here's more:

2013 will mark a flight to quality for occupiers as the differential between Grade-A and Grade-B office rentals compresses, and hence we see less downside risk for Grade-A office rentals.

Moreover, office REITs will continue to book positiverental reversions as rentals signed 3-4 years ago at the bottom of the market come up for renewal.

Office demand has surprised on the upside, driven by smaller firms in the commodities, trading, legal, IT and manufacturing space. We expect office demand to normalise to 1.6m sf in 2013, from an expected demand of 2m sf in 2012. While office rentals may fall a further 4-6%, they will likely bottom out over the next 2-3 quarters.

Office REITs and related stocks will benefit from positive rental reversions in the sector, despite falling office rentals, offering a compelling riskreward proposition. 

Office demand has surprised on the upside, with 1.7m sf of demand in 9M12. This is in line with the average 2.1m sf p.a. of demand since 2006 (excluding the financial crisis in 2008-09).

This came despite weaker demand from the banking sector and was driven by smaller firms in the commodities, trading, legal, IT and manufacturing space. Although larger banks such as Credit Suisse,