OFFICE rents in prime districts could plunge 60 per cent to hit a six-year low over the next two years.

A Citi report dated Jan 12 projects that about 5 million sq ft of commercial space will come into the market this year and the next. But while supply is surging, demand has collapsed as companies implement cost-cutting measures.

Citigroup economist Chua Hak Bin, in the most bearish prediction so far, said oversupply and dwindling demand coupled with a dire economic outlook will severely dent rent levels.

He said: 'Many companies are trying to sub-lease...and are willing to go into the market to offer much lower rates to cover their costs...this could depress commercial rates much further.'

During the tech bubble bust in 2001, property rates also plummeted, but the cause was a fall in demand. With the added problem of excess supply now, rates will likely take a huge beating.

In the Citi report, analyst Wendy Koh said that prime rental rates 'are likely to fall by a further 60 per cent over the next two years to reach $6 psf (per sq ft)', assuming that the net space given up is about 50,000 sq ft.

If substantially more than that is given up, rates could push the historic low of $4.50 psf set during the Sars crisis, she added.

Dr Chua said that the Government will have to address the excess supply. One way would be to exempt companies that make commercial property transactions and rents from paying GST.

'Residential property is already exempt, why not commercial? Commercial is of strategic nature, too,' he said.

Rental rates surged to a peak of $18.40 at the beginning of last year due to the property boom.

Earlier this month, consultancy Cushman and Wakefield predicted that prime office rents will fall to $12 psf a month this year and to about $8 psf next year.

They could be as low as $7.50 psf by 2011 with office vacancy rates rising to 11 to 15 per cent.

Prime rental rates fell 18.8 per cent in the fourth quarter last year from the third, recording not only the first quarterly decline since the 1980s but also the largest single-quarter drop.

ROBIN CHAN

This article was first published in The Straits Times on January 22, 2009.