Published December 11, 2008

Prime office rentals coming down to earth

Q4 sees them crash by up to 20% in some cases as tenants call the shots

By KALPANA RASHIWALA

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(SINGAPORE) Landlords may be frowning but those looking for office space have reason to cheer. After climbing steadily for nearly four years, average Grade A and prime office rental values in Singapore are estimated to have slipped about 20 per cent in the fourth quarter of this year over the preceding quarter, according to latest figures by CB Richard Ellis.

Grade A covers the best office space within CBRE's prime office space basket.

The Q4 decline means that for the whole of this year, the estimated fall in rentals is around 13 per cent for Grade A space and 14 per cent for prime space. 'Modest rental growth featured in the early part of 2008, but the market had peaked by Q3 2008. It was only in Q4 that the sheer depth of the financial crisis pitched the office market into decline,' CBRE executive director Moray Armstrong said.

'We expect further downward pressure on rents through 2009,' he added without elaborating.

The firm estimates the average monthly Grade A office rental value at the end of this year at about $15 per square foot, down from $18.80 psf in Q3. The average prime office rental value in Q4 is estimated to have eased to $12.90 psf from $16.10 psf in Q3. The Q3 figures were unchanged from the preceding three months.

The latest figures confirm that the office upcycle which had seen rents galloping over the past two years has ended.

Office rents nearly doubled last year, rising 96 per cent for Grade A category and 92 per cent for prime space. That was on top of respective gains of 53 and 50 per cent posted in 2006.

Putting the latest rental slide in perspective, Mr Armstrong said: 'The extraordinary pace of rental growth experienced through the past three years was clearly not sustainable and would have been arrested by the increased volume of new supply in the pipeline. We had already anticipated a supply-led softening in the market from 2010 onwards.

'The rapid deterioration in the economy and loss of business confidence have accelerated the process as office demand has dried up.'

Tenant retention is the top priority for existing landlords. Next year is likely to be a market where lease renewals outnumber relocations, Mr Armstrong says.

Cushman & Wakefield Singapore managing director Donald Han predicts Grade A office rents will weaken a further 10-15 per cent in first-half 2009 from current levels. 'Landlords are more keen to provide existing tenants with an incentive to retain them, in terms of rental discounts during lease renewal negotiations; because if they leave, the landlord will suffer downtime until it finds a replacement tenant that will also have to be given fitting-out time. This means loss of rental income.'

The office rental slide reflects a reversal of the market dynamics to a more demand-led rather than a supply-led model, Mr Han argues. 'Office rents had surged because of a shortage of existing office stock; now rents are softening because of weakening demand,' he explains.

Another seasoned market watcher said while a 20 per cent drop in Q4 rentals seems alarming, the absolute drop of about $3.20 to $3.80 psf in monthly rents is not so, given that 'rents were at artificially high levels' on the back of shortage of existing Grade A and prime space.

Grade A vacancy rates had been sub-1 per cent for almost two years before rising to 1.2 per cent in Q3. Some analysts estimate this will rise further to over 2 per cent by end-2008.

CBRE does not expect to see significant changes in vacancy levels until sizeable new office developments start to be completed from 2010.

Tenants, meanwhile, are looking to contain costs during the economic downturn, Cushman's Mr Han observes.

CBRE's Mr Armstrong says: 'Corporates will be under severe pressure to contain and indeed reduce costs. (But) the reality in the Singapore office market is that many tenants with renewals and rent reviews next year under leases committed three to four years ago will still be faced with rents that could potentially increase by 75 per cent to 150 per cent. We expect some fairly robust negotiations.'

He also predicts an increase in subletting and surrenders of space by tenants if job attrition in the key financial services sector spirals.

'Take-up in new developments will inevitably be sluggish until demand improves and tenants are able to secure capital expenditure approvals to relocate. It will be highly competitive,' Mr Armstrong says.

Published December 10, 2008

RHB Islamic Bank drops 'un-Islamic' contract

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(KUALA LUMPUR) Malaysian Syariah lender RHB Islamic Bank Bhd will no longer use a contract rejected as un-Islamic by Middle Eastern scholars, in a bid to adopt globally accepted Syariah standards, a newspaper said yesterday.

RHB Islamic, the Syariah banking arm of Malaysia's fourth-largest lender RHB, has dropped the use of the bai bithaman ajil structure, the Malaysian Reserve said, quoting RHB Islamic's head of Syariah division Ahmad Suhaimi Yahya.

'RHB Islamic has taken a stance of phasing out products and services based on BBA (bai bithaman ajil) or bai al-ina with effect from Oct 1,' Mr Suhaimi was quoted as saying. 'This is based on (its) Syariah committee's advice to adopt globally accepted Syariah principles.'

The bai bithaman ajil contract is where a bank buys an asset for its customer and sells it to him at a profit, with the sum to be repaid in instalments.

The newspaper said that RHB Islamic would use the musharaka mutanaqisah contract instead, which is where a partner gives the right to his equity partner to acquire the invested asset through a one-time payment or periodical instalments. -- Reuters

Published December 10, 2008

KL state firms look to global tie-ups to ride downturn

Proton, Mitsubishi ink non-equity deal; MAS in talks with Qantas on alliance

By PAULINE NG
IN KUALA LUMPUR

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WITH nationalism standing in the way of corporate mergers, Malaysia's state- owned firms are looking to strategic alliances as the next best option to riding out the economic downturn ahead.

National car company Proton last week announced plans to collaborate with Japan's Mitsubishi Motors on a new compact hatchback, as well as a rebadging exercise between both auto players.

The non-equity partnership comes four years after both firms parted company, Mitsubishi being an original shareholder of Proton and providing it with the expertise to develop its first few models before exiting Proton in 2004.

The alliance also comes in the wake of last year's aborted equity deal by Germany's Volkswagen AG after the Malaysians refused to cede control of Proton to the Germans despite the Malaysian carmaker's acknowledged need for a strong global partner to better ensure its survival. The Malaysians had refused to compromise ostensibly because of the need to ensure Proton's social obligations to its mainly Malay workforce and chain of suppliers would be kept intact.

In the case of Malaysia Airlines, it has revealed that it is in discussions with a number of airlines with a view to collaborating and creating synergies for growth, with talks ranging from code shares to inter-lining partnerships.

But it is MAS' reported strategic alliance with Australia's Qantas that has come under the spotlight. MAS already works with Qantas in the maintenance, repair and overhaul business, servicing some of the latter's aircraft. Analysts see a further alliance as a natural progression.

Even if it falls short of an equity partnership or merger, the proposed tie-up is expected to be superior in that it goes beyond the usual alliances or code-shares.

While it once bled, MAS is now cash rich to the tune of nearly RM5 billion (S$2 billion). But with an increasing number of airlines and carmakers either going bust or trying to avoid bankruptcy in the current global financial crisis, the move to consolidate while exploiting mutual synergies is understandable.

Analysts believe MAS to be near 'saturation point' going solo and a collaboration involving pricing, scheduling, network arrangement and even procurement which would increase seat inventory for both airlines, could move it up another notch.

Details are vague but both airlines are expected to keep their identities and branding separate. Likewise for their boards and shareholders, although some directors could sit on both boards to ensure a 'common direction'.

Given that Qantas is also in merger talks with British Airways, many are doubtful of a MAS-Qantas tie-up. 'It's difficult enough negotiating with one party, but to attempt it with two parties at the same time would be devilishly hard,' said a sceptic. To compound matters, all three are national carriers and would be chary of national interests being impinged upon.

Regulatory approval is seen as the other stumbling block, especially if it leads to a dilution of national identity. 'MAS won't want to compromise for the mileage, but I'm not so sure about Proton, which has no other way out,' said Ang Kok Heng, chief investment officer of Philip Capital.

Desperate times may call for desperate measures, but given prevailing sensitivities, alliances are still proving to be a more practical option than mergers for national firms.