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Office real estate investment trusts (REITs) face a tough future given the prevailing weak demand and large upcoming supply, according to a report from RHB.
In the past three quarters, monthly rents of Grade A office space in the city-state fell by about 9 percent from its peak of S$11.40 per sq ft in Q1 2015. The decline is attributed to the significant supply pipeline in 2016 amid a weaker global economy, with softer demand for commodities, particularly oil and gas.
This year, as much as 4.2 million sq ft of office spaces are expected to enter the market, up 6.2 percent from 2015’s supply. But because this figure is around 3.5 times more than the average annual net demand of just 1.2 million sq ft in the past ten years, the report said it may take at least four years before this space is absorbed. Moreover, demand for such spaces is forecasted to remain soft in light of the sluggish and volatile global economy.
For example, Guoco Tower and Duo Tower only managed to secure tenants for 10 percent and 25 percent of their total net lettable areas (NLAs), respectively.
As both buildings account for a large portion of this year’s upcoming supply, the low commitment levels is worrying, and this could lead to a further drop in office rents of up to 15 percent in 2016, said the financial institution.
Nevertheless, Singapore’s office market is expected to rebound in 2018 due to limited supply as only one office tower set to be completed during the period.
“In our view, we think that rental rates should hit rock bottom by end-2017, as most of the office supply is expected to be completed only by Q4 2016,” added RHB.
Nikki De Guzman, Editor at CommercialGuru, edited this story. To contact her about this or other stories email nikki@propertyguru.com.sg
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