It seems a tale of two cities between Singapore’s office and rental markets, going by the latest data from the Urban Redevelopment Authority (URA).

The figures suggest that the office rental cycle has peaked against the backdrop of clouded business sentiments and tenant resistance to further rental hikes. On the other hand, retail rents, which have been in a multi-year decline phase, may finally have bottomed.

The URA’s office rental index for the central region slipped 3.2 per cent quarter on quarter in the fourth quarter of 2019, the biggest q-o-q decline since first quarter 2017.

The full-year 2019 drop of 3.1 per cent is in stark contrast with the 7.4 per cent gain in 2018. URA’s retail rental index for the central region climbed 2.3 per cent quarter on quarter for Q4 last year – the same rate of increase in Q3 2019. This was the second consecutive q-o-q rise in the index, which posted a full-year gain of 2.9 percent. It had dipped one per cent in 2018.

While some market watchers are sanguine that Singapore’s long-ailing retail market may have finally found its equilibrium, setting the stage for rent stabilisation around current levels, they also highlight that the retail business operating environment remains fraught with challenges. The outlook for rents is thus mixed.

The uptick in retail rents came chiefly from the prime Orchard Road shopping belt. URA’s median rental (based on lease commencement) for the Orchard Planning Area posted a 3.9 per cent q-o-q rise in Q4 2019, surpassing the increases of 2.9 per cent and 1.4 per cent respectively in the Central Area outside Orchard, and Outside the Central Area (OCA).

Year on year, the Q4 2019 median rental for Orchard was up 5.9 per cent, again outpacing rises of 2.7 per cent for Central Area outside Orchard, and 0.9 per cent in OCA.

Cushman & Wakefield’s head of research for Singapore and South-east Asia, Christine Li, said that the positive rental growth in Orchard was driven by limited supply of new prime retail space amid rising tourist arrivals. “We observed that in the prime Orchard Road belt, landlords in some malls still managed to achieve positive rental reversion, signing up new tenants for vacated spaces at higher rents in 2019.

“Despite slower economic growth, prime spaces – for example basement units near the MRT station entrance and ground-floor space with street frontage along Orchard Road – continue to enjoy very high or full occupancy rates, allowing landlords to hold or even raise rents.”

According to Cushman & Wakefield’s prime retail basket of properties, Orchard Road rents rose 2.6 per cent for the whole of last year, outpacing increases of 0.8 per cent in “Other city areas” and 0.2 per cent in the suburbs.
CBRE’s head of research for South-east Asia, Desmond Sim, noted that despite the consolidation among some retail chains, replacement tenants are still prepared to pay high rents for choice space in prime Orchard Road malls. “On the
flip side, demand for retail spaces in secondary locations and corridors remains challenged and rental growth in these areas may thus be slower.”

Despite all the positive talk about Orchard Road retail rents, analysts project a mixed outlook on the whole. Angelia Phua, consulting director at JLL Singapore’s research and consultancy department, says the retail rental growth momentum seen in the last two quarters of 2019 is likely to spill over into this year. That said, “the pace of growth could be modest, given the sluggish global and domestic economic growth outlook”, she added.

Colliers International’s head of research for Singapore, Tricia Song, too said that despite the stabilisation of retail rents, any recovery is likely to be subdued given the lack of catalysts.

Mr Sim of CBRE noted that retail sales continue to decline while tourist spending has weakened amid global uncertainties. “The saving grace remains the tight supply pipeline for the next three to five years, which will help to keep the retail market in equilibrium.”

This year, only 73,000 sq m of retail space island-wide is expected to be completed – less than half the 170,150 sq m completed last year, said Ms Li. She predicts a marginal decline in retail rents for her firm’s “Other city areas” basket, as the sector is not supported by big residential catchments; neither does it attract steady tourist footfall. “Orchard and suburban retail rents are expected to see flattish growth in 2020.”

As for the correction in office rents, Mr Sim said this likely reflects some landlords becoming more realistic in their rental expectations to fill existing vacancies. He highlighted that “demand from the agile space sector has slowed notably, following its rapid expansion in 2018”.

JLL’s head of research and consultancy for Singapore, Tay Huey Ying, said that amid uncertainty about business prospects and muted economic growth, many businesses have held off expansion and relocation plans. “Resistance to
office rental hikes has intensified with buildings facing higher vacancy pressure increasingly succumbing to downward pressure.”

On a brighter note, the net absorption of office space island-wide amounted to 1.67 million sq ft last year, outweighing the 279,861 sq ft rise in the stock of office space.

Straits Times, 24 Jan 2020