Strong rental growth was witnessed across major sub-markets in the small space category (2,000 – 5,000 sf) in 2Q06. Average rents of Prime Grade A office buildings increased 11.3% q-o-q to reach $6.90 psf per month, while rents of Prime Grade B office climbed 7.1% to cross the $5.00 mark, at $5.30 psf per month. Rents in both sub-markets have increased more than 30% over the past year and have recovered around 48% from their troughs two years ago. Compared to their peaks in 1Q01 and 4Q96, average rents are still some 18% and 36% lower respectively.

Together with buildings located in the secondary market, average rents in the CBD Core area increased from $4.60 to $5.00 psf per month, representing a 8.7% q-o-q change. Despite a y-o-y improvement of almost 30%, average rents in the CBD Core are still some 42% from its peak in 1996. Elsewhere, office rents along Orchard Road continued its upward movement, rising 4.1% q-o-q to $5.05 psf per month, while Grade A space within the same vicinity posted a stronger rental growth of 10.2% to achieve $6.50 psf per month in 2Q06.

In view of rising rents within the CBD Core and downward filtering of demand, improving occupancy have helped rents in the Decentralized Areas to post the highest quarterly growth in 2Q06. Led by quality buildings located in the City Fringe, rents in the Decentralized Areas have jumped 16.4% q-o-q.

Likewise in the large space category (10,000 – 20,000 sf), rents continued to rise over the April to June quarter. Grade A office buildings in Marina Centre led in terms of growth, posting a quarterly increase of 12.5% to reach $6.30 psf per month. Meanwhile, Grade A rents in Raffles Place and Orchard Road registered growth of 11.9% and 8.8% over the same time period to hit $6.60 and $6.20 psf per month respectively. Across major submarkets, rents have increased 30-40% y-o-y and are some 20-25% off their peaks in 2001. A shortage of large office space in the market is likely to drive rents further over the short- to medium-term.
 
Average capital values are at the start of an uptrend and are some 50-70% off their peak. This, together with the limited supply, rising rents and healthy occupancy levels have translated into more investment activities. Looking forward, good quality buildings across the island is likely to see greater demand as competition for space tightens and the market continues to favour the landlord. Following the sale of SIA building for $344 million or $1,165 psf per plot ratio at the close of the quarter, total investment sales for the office sector totalled over $690 million.

Investment activities amongst funds and REITs are likely to continue over the next half of the year. Given that the partially-completed One Raffles Quay (ORQ) has been fully taken-up, and there are no major supply of office space till the first phase of the BFC in 2009, the outlook of the office market is positive. Prime Grade A rents in Raffles Place is likely to pick up another 15-20% over the next six months, bringing y-o-y growth to 30-40%.