Office, retail segments set to tumble

In the third quarter of 2013, I shifted my company office from a landmark building at Orchard Road to a smaller office block, also along Orchard Road, that cost S$9.00 per square foot per month.

In July this year, with vacant office space seeming to have increased along the Orchard Road belt, the landlord offered to lower the rent by 11 per cent to S$8.00 psf per month. However, I looked around in the vicinity and managed to secure a deal in another office tower at S$6.00 psf per month, or 33 per cent below what was paid two years earlier.

On the other hand, the official data for Central Region office rentals, which includes those in the Orchard Road belt, shows there has been an increase of 5.1 per cent from two years ago.

While the above example of our saving on office rental is a single reference point, the real situation on the ground may be deteriorating at a faster pace than the 3.2 per cent year-on-year decline or the 5.4 per cent decline from the peak in the first quarter this year.

The vacant stock of office space has hovered at around 7.7 million sq ft since 2013 and the vacancy rate has averaged at 9.6 per cent. However, the current business environment and future outlook are weak and given the massive supply of 5.2 million sq ft of new office space expected next year — versus an average of 1.4 million sq ft per year from 2008 to 2015 — a sharper drop in office rentals and prices in the next two years is expected.

Retail Segment

Average retail rents in the Central Region fell by a mere 3.2 per cent over the past 12 months. However, other data points indicate that the retail segment seems to be deteriorating fast. The vacant stock of retail space climbed 46 per cent from 3.1 million sq ft (vacancy rate of 5.1 per cent) in the first quarter of 2013 to 4.5 million sq ft (vacancy rate of 7 per cent) in the third quarter of this year. The upcoming supply of 2.4 million sq ft next year and 2 million sq ft in 2017 are well above the annual average of 1.1 million sq ft supplied in the past four years.

Of particular concern is the strata-titled retail units that have been purchased by many small investors, who were enticed into the segment after cooling measures were imposed on the residential and the industrial segments. The craze for strata-titled retail shops was epitomised by Alexandra Central, a retail-cum-hotel development on the site of the former SAFRA Bukit Merah. The 116 shops in this 99-year leasehold project were launched for sale in January 2013 with an average of 20 cheques submitted per shop across a price range of S$4,000 to S$8,000 per sq ft. The mall was officially completed at the end of last year but this month, about a year later, there are only 32 tenants in the mall.

Vacant shop units in Scotts Road and Orchard Road are also adding up. Level 1 at Far East Plaza, previously popular with teenagers and young office workers, has about 30 out of around 115 shop units available. Buildings where vacant units are consistently available for rent include strata-titled mixed development projects such as Concorde Hotel and Shopping Mall, and Orchard Towers. However, buildings owned and managed by single owners, such as Orchard Central and Orchard Gateway, are not spared either. In Shaw Centre, where a major renovation was completed about 18 months ago, about 25 out of the 100 shops remain empty today.

There is no formula that guarantees the success of retail malls. Even if an adjoining mall is packed with shopper traffic, investors should not assume that the new mall will be able to draw similar footfall. Furthermore, having another component within the mixed development, such as hotel, residential or office, may not add traffic to the retail shops either. An obvious example would be Alexandra Central, which has a 442-room hotel attached, and its crowded neighbour IKEA Alexandra.

Many more mixed-development projects with strata-titled retail units within will come onstream in the next two years: KAP at King Albert Park, MacPherson Mall, Kensington Square at Tai Keng Gardens, Newest at West Coast Drive, Royal Square at Novena, Arc 380 at Jalan Besar, City Gate at Beach Road, etc. It remains to be seen whether there will be enough tenants to fill up the retail spaces and whether additional consumer traffic could be contributed by the other components of the mixed-development projects.

I believe the official data for rentals and prices in both the office and retail segments have yet to fully reflect the reality on the ground. Over the next two to three years, prices and rentals could be dropping perhaps 8 to 10 per cent per year. The current owners of strata-titled shops and office units should take heed of the weakening external demand and lower their expected rentals in order to secure tenants quickly, before rising interest rates eat up all of the investment returns.

ABOUT THE AUTHOR: Ku Swee Yong is a licensed real estate agent and the CEO of Century 21 Singapore. His third book “Real Estate Realities – Accommodating the Investment Needs of Today’s Society” is a nominee for the Popular Readers’ Choice Awards 2015.