Office vacancy rates breach 5% mark in Q411

Rental and capital gains dip even further.

According to Savills Research Singapore, after enjoying vacancies below the 5.0% mark for five consecutive quarters, CBD Grade A offices saw vacancy rates rise to 6.9% in Q4/2011. Except for the Beach Road/Middle Road and Tanjong Pagar areas, increases in vacancy rates were witnessed in most micro-markets.

The Shenton Way area recorded the largest vacancy increase of 8.8 percentage points to 14.7% by the end of Q4. Savills says, this arose mainly from unlet space in newly completed buildings. The City Hall micro-market saw vacancy levels going up 222 basis points, due largely to the secondary stock returned by Citi Group.

Grade A office rents meanwhile averaged S$8.71 per sq ft per month in Q4/2011, slipping for the second successive quarter by 1.5% from S$8.86 per sq ft per month in Q3. Rents in most micromarkets declined faster in Q4/2011 compared with the previous quarter.

“This confirms that Grade A office rents have now softened and are now in the early stages of a downswing,” says Savills.

However, average rents are still higher than 2010 by 7.8% year-on-year. Compared with the remaining Grade A stock, rents in the international-grade office buildings recorded a greater decline of 4.6% quarter-on-quarter in Q4/2011.

“The strong rental growth seen in the first half of 2011 has been reined-in, as landlords adopted a defensive approach in attracting new tenants. In Q4/2011, investment activity resumed with six office buildings sold for a total of S$2.7 billion,” says Savills.

Notable deal was K-REIT’s S$2.01- billion acquisition of an 87.5% stake in Ocean Financial Centre. This translates to a unit price of S$2,600 per sq ft of net lettable area. However, sales of investment-grade strata office remained tepid. Only one transaction above S$10 million was recorded – the 41st storey of Suntec City Tower 2 was sold for S$2,570 per sq ft in December, significantly lower than those transacted in the preceding quarter at the same development.

The capital value of Grade A offices fell by 3.8% from S$2,650 per sq ft in Q3/2011 to S$2,550 per sq ft in Q4/2011. This is the first drop since capital values recovered from the trough in Q4/2009. Nevertheless, on a yearly basis, capital values were up by 8.5% from S$2,350 per sq ft in Q4/2010.