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WHILE retail rentals have proved fairly flat so far this year, office rentals have been on a roll. They have already risen 5.2 per cent in the year to date, outpacing the 1.3 per cent full-year growth last year - and are likely to continue going up.
Analysts expect prime Central Business District (CBD) Grade A office rents to surge further by 7-15 per cent for the rest of the year, as tenants jostle for limited options amid a dearth of office space supply.
URA data released yesterday showed office rentals rising 2.8 per cent in the second quarter of this year - the highest quarterly growth in more than three years, and coming on the heels of a 2.4 per cent increase in Q1.
Rentals for offices in the Downtown Core (the CBD, City Hall, Bugis and Marina Centre zones) and the Orchard Planning Area registered a more pronounced increase of 3.2 per cent to a median S$10.03 per sq ft (psf) a month in Q2 - above the "psychological benchmark" of S$10 psf.
No office projects were completed in the CBD in the quarter, and there will be none soon as well - at least until CapitaGreen in Market Street is completed in December.
In fact, no CBD offices are expected to be ready until 2016, which is when three developments - Guoco Tower, Marina One, and Duo - come onstream. Not surprisingly then, vacancies fell from 10 per cent in Q1 to 9.6 per cent in Q2, and rents rose.
Savills Singapore research head Alan Cheong said: "During lease negotiations, the pendulum has swung in favour of landlords and caused signing rents to move closer to the asking rents."
And tenants who seek smaller space tend to pay higher psf prices, partly also because they have less clout to bargain, he added.
This is all playing out against a backdrop of a global economy that has got on a more solid footing, creating a better business climate, which has in turn paved the way for more firms to ramp up growth plans, thus generating more demand for office space
R'ST Research's director Ong Kah Seng said: "Office rents have been on a downward trend for the past two years post-financial crisis, so we are seeing some laggard rental recovery this year, in sync with the global economic recovery."
Contrary to the upward trend in rents, however, the prices of office space - which is not so much a function of supply as it is a function of investment activity - stayed unchanged in Q2, following a 0.5 per cent increase in Q1.
CBRE research head Desmond Sim suggested that this could be because transactions in the quarter changed hands at market value, and so did not push up capital values.
Chia Siew Chuin, the director of research and advisory at Colliers, attributed this to a lack of new strata-titled office project launches in Q2.
Most office and retail space transactions tend to be of strata-titled units, rather than investment sales of a few floors or en bloc sales of entire buildings.
"The continued enforcement of the total debt servicing ratio (TDSR), which caps buyers' loans, and concerns of an impending interest rate hike weigh on the ability of strata-titled office owners to significantly raise prices during the quarter," Ms Chia said.
But she warned that the impending tightening in global liquidity could cause financial stress in open and trade-dependent markets like Singapore's, and that some firms could hold back from expanding if rental costs accelerate at an unsustainable pace.
In retail space, rents rose by 0.6 per cent in Q2, after falling 0.3 per cent in Q1, so they essentially plateaued in the first half of 2014. URA's index tracks base rents with gross turnover component for those to whom it is applicable.
Landlords may have become more careful with raising rents, now that they are under scrutiny; they also do not want to price themselves out of the market as retailers grow more resistant to rental increases, said CBRE's Mr Sim.
Prices of retail space fell 0.3 per cent in Q2 after having stayed unchanged in Q1, similarly restrained by buyers' loan restrictions.
"In the space of a year, the strata-titled retail sales market has had the wind dramatically taken out of its sails," said Colliers' Ms Chia.
Some 190 units changed hands in the first half, nowhere near the dramatic 642 transactions a year ago, pre-TDSR.
Most expect retail sales to stay flattish, or increase at inflationary levels at best, for the rest of 2014.
URA office and retail indices do not cover the whole island, but only 22 planning areas in the central area, including Downtown Core, Orchard, Marina East and South, and in fringe areas such as Newton, Outram, Bishan, Geylang and Queenstown.
Analysts like R'ST Research's Mr Ong took issue with this, arguing that the suburban shopping sector was as active, if not more so, and that offices are decentralising and moving to locations outside the CBD. Much of the action in these two markets are not currently reflected in the data, he said.