Experts Surprised By 3.5% Office Rental Drop In Q3
SINGAPORE – Most real estate experts were taken by surprise by the 3.5 percent quarterly decline in office rents in Q3 2021, according to a report from The Business Times that was updated on Friday evening (22 October, SGT).
Still, property consultants pointed out that Category 1 office buildings recorded their 2nd straight quarter-on-quarter gain in their monthly median psf rent. On the other hand, that for Category 2 office buildings or lower quality office space declined during the 3rd quarter.
Based on the latest government data, median monthly rent of Category 1 office buildings for leases that commenced in Q3 2021 edged up by 0.8 percent from S$9.99 psf in Q2 2021 to S$10.07 psf during the period under review. In comparison, that for Category 2 office space dipped 1.3 percent from S$5.23 psf to S$5.16 psf.
As such, one factor behind the 3.5 percent islandwide fall in office rents is the “flight-to-quality” by occupants who transferred from ageing office projects into newer, better-located ones in a bid to leverage on the prevailing sluggish market conditions.
While the 2-tier market trend was acknowledged by a veteran market observer, the expert underscored another reason for the continued drop in rents for Category 2 office buildings.
The industry observer explained that some owners of Category 2 office buildings don’t have the financial capability to pay for the fit-out expenses of tenants or grant such occupants rent-free periods. Hence, such landlords are likely to accept a lower rental rate to support the occupancy level of their commercial properties.
Conversely, choice Category 1 office buildings are usually held by more affluent owners that have the financial capability to offer attractive rental incentives to secure new tenants or retain occupants whose leases are coming up for renewal.
Furthermore, another market watcher shared that the latest statistics from the Urban Redevelopment Authority (URA) is based on rates stated in rental contracts submitted to the Inland Revenue Authority of Singapore (IRAS) for stamp duty payment. And the tax agency may not be agreeable to have some rental incentives excluded from the rentals stated in the agreement.
Thus, “the rental figure that flows through to the URA index may be inflated in such cases. This also helps landlords to protect the high headline rent figures in their buildings, which will come in handy for future lease negotiations,” said the industry watcher who represents major office landlords in Singapore.