In spite of recent uncertainties in the financial markets, there was no discernible dampening of demand for office space in Singapore. Whilst demand remained broadbased with sectors such as energy, printing, IT, insurance and foreign law firms taking up office space in the third quarter, it was the financial and banking sector that continued to dominate as the potential source for large space requirements.



While we foresee further upside to rentals, we expect that the pace of rental growth may ease going forward. The observed tenants' increasing resistance to rental hikes while occupiers are more prepared to explore lower cost locations and alternative premises options such as business parks & hi- tech spaces. The prospect of more future supply is also a consideration, although the time lag before such spaces are completed will still place constraints on occupiers.

Prime office rent averaged $12.60 psf/month, rising 16.7 per cent quarter- on- quarter and 82.6 per cent year- on- year. Prime rents have exceeded the historical peak in 1990 ($11.50 psf/month) as well as our earlier forecast of $12.50 psf/month for end- 2007. Grade A office rent averaged $14.90 psf/month, reflecting an increase of 13.7 per cent quarter- on- quarter and 96.1 per cent year- on- year.

The government has reacted to escalating office costs and lack of expansion space by injecting more sites for sale under the 2H 2007 Government Land Sales (GLS) programme. As at end-August, full potential supply (the aggregate from known private sector project supply, awarded GLS sites as well as potential supply from expected future land sales) amounted to 10.8 million square feet for 2007-2012.

This reflects an increase of 147 per cent in absolute quantum, from the full potential supply of 4.4 million square feet that was identified two quarters ago at the end of March 2007. This works out to an average potential annual supply of 1.806 million square feet for the next six years, higher than the past ten- year average supply of 1.53 million square feet per annum.

The average projects annual take- up of 1.6 million square feet for 2007-2012, even if full potential supply materalises, we forecast that there will be relative equilibrium between supply and take- up over this period and remain in the range of 91.0 per cent to 95.0 per cent.

The office investment market remained active with some $3.459 billion worth of transactions chalked up during the third quarter. Notably, a fund linked to Goldman Sachs bought Chevron House from CapitaLand for $366.4 million ($2,780 psf over NLA), setting a new price benchmark - exceeding the rate of $2,650 per square foot for One Finlayson Green.

The average capital value for prime offices was estimated at $2,900 per square foot in Q3 07, reflecting an increase of 16.0 per cent quarter- on- quarter and 114.8 per cent year- on- year. Prime office yields were at 4.32 per cent up slightly from 4.23 per cent in Q2 07.

On the supply side, the government's reaction has been measured so far, but care is required in monitoring any future change in demand for office space. As such, it may be timely for all in the sector - landlords, tenants, policy-makers - to take stock of the market dynamics in setting out policy and making decisions.