What's behind the surprise 3.5% drop in URA's office rental index in Q3

Citi Commercial Pte Ltd

MOST property consultants were surprised by the 3.5 per cent quarter-on-quarter drop in the Urban Redevelopment Authority’s (URA) central region office rental index in Q3 2021, which came after the 1.3 per cent rise in Q2 2021.

Consultants attribute this to a “flight-to-quality” by tenants resulting in a two-tier market, pointing to URA’s data showing that Category 1 office buildings - covering the better-quality buildings in the city area - posting the second consecutive q-o-q increase in the per square foot monthly median rental. In contrast, the monthly median rental fell in Q3 for the remaining office space in Singapore - or Category 2.

A seasoned market observer - while acknowledging the ongoing flight-to-quality as some tenants choose to relocate from older office buildings into newer, better-located ones and take advantage of current soft market conditions - highlighted another reason for the continued decline in office rents for Category 2 buildings.

Some of these buildings' owners lack financial power to pay for tenants' fit-out expenses or grant them extended rent-free period of tenants; thus they are more likely to agree to a lower rental rate to support occupancy rates in their properties.

On the other hand, the choice buildings in Category 1 are typically held by more deep-pocketed owners with the wherewithal to offer attractive incentives to either retain tenants whose leases are coming up for renewal or secure new tenants.

The URA collects office rental data based on what is stated in rental contracts submitted to the Inland Revenue Authority of Singapore for stamp duty payment. The taxman may not be agreeable to have some of these incentives excluded from the rentals stated in the contract. “So the rental figure that flows through to the URA index may be inflated in such cases. This also helps landlords to protect the high headline rent figures in their buildings, which will come in handy for future lease negotiations,” said another industry observer who acts for major office landlords.

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