Office prices are expected to decline further. Since Q3 2019, prices have fallen by 12.1% and this compares with 24.4% during the Global Financial Crisis(Q3 2008 to Q3 2009). Unlike the GFC, where prices moderated by 12.2% in a quarter, prices to show a more gradual decline over a longer period of time. Due to government support, landlords can defer the repayment for commercial loans. As such, sellers have stronger holding power and are able to better hold on to their asking prices. Nonetheless, the market may witness some opportunistic buys as some owners cash out to meet business obligations. Nonetheless, Singapore office mid-long term fundamentals remain unchanged, given limited strata office supply and Singapore’s position as a gateway city in APAC.
Central region office rents held steady and remained unchanged in Q2 2020. This was due to the circuit breaker which restricted movement and office viewings and also to landlords holding on to their rents as they evaluate the situation. Nonetheless, rents are expected to fall in 2H2020, as more tenants give up space and vacancies rise. In Q2 2020, central region office (public and private) net absorption was -505,908 sf, the largest quarterly negative decline in net absorption since Q1 2003 (-538,200 sf), during the SARS period. As such, central region office vacancy rates rose to 11.4% in Q2 2020 from 10.2% in Q1 2020.
Going forward, we see higher levels of renewals rather than new leases which require large fit-out costs upfront as companies focus on cost containment. Currently, renewal rental rates are more resilient, while rents for new leases have experienced a larger decrease. However, the disparity between rents for renewals and new leases is expected to narrow in the future, especially if landlords start offering incentives for new leases in the form of fit-out subsidies.
The retail scene will see more casualties as social distancing measures are expected to persist. Many activity-based tenants such as F&B, entertainment or health and wellness will not be able to operate at full capacity, making their businesses unviable. New demand will be limited as well, as tenants explore online or delivery options given economic uncertainties and COVID-19 concerns. Given rising vacancies, landlords are expected to be more flexible to maintain occupancy rates. This could entail shorter term lease renewals or a higher Gross Turnover Rent (GTO) component in their new leases or renewals.
Going forward, retail rents should continue to fall as the market grapples with higher vacancy rates and limited demand. However, the decline in rents will differ across malls as the first-tier malls with a strong tenant profile and are able to maintain occupancies will be less inclined to cut their rents. As such, the gap between first tier and second tier malls could widen further, as landlords become more cautious in tenant selection due to higher GTO component and a consolidation of tenant operations to contain costs.
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