By UMA SHANKARI

A 20 to 25 per cent fall in Grade A office rents in Singapore this year will widen the gap between rents here and in Hong Kong and give Singapore a competitive advantage when it comes to firms looking to expand in Asia, property firm Savills said yesterday.

Rents here could fall to as low as $5 per square foot (psf) per month in 2011 as massive new supply comes onstream, the firm's research shows. Grade A office rents stood at $8.80 psf per month at the end of 2009, according to Savills.

By contrast, office rents in Hong Kong's CBD are expected to climb 5 to 10 per cent in 2010 on the back of a supply crunch and anticipated surge in demand from mainland Chinese firms looking to expand.

'The good news is that over the next year or two, Singapore is going to look a lot more competitive in the region, particularly in comparison to Hong Kong,' said Simon Smith, head of research & consultancy at Savills' Asia Pacific unit. His research shows that the Hong Kong Grade A office rental premium over Singapore could climb to as high as 150 per cent.

The Grade A office supply here will rise by 47 per cent between 2010 and 2012, with 7.7 million square feet of space being added.

Savills' worst-case scenario forecast assumes that take-up will average at 950,000 square feet a year over the next three years. The rental market here will then bottom out in 2011 at an average $5 psf per month.

An analyst from another property firm however said that a fall to $5 psf per month is 'possible', but added that he was not sure how likely it is that the fall will be so large.

Separately, data from CB Richard Ellis (CBRE) showed that Grade A office rents in Singapore fell to $8.10 at end 2009 from $15 at the end of 2008. The firm expects Grade A office rents to fall to $7 by the end of 2010 - a year-on-year fall of 13.6 per cent.

In Hong Kong, the Grade A office stock is expected to climb by a much smaller 6 per cent from 2010 to 2012, Savills estimates.

The supply pipeline for Hong Kong Island remains subdued for the foreseeable future, so 'given the supply of space is still constrained, vacancy levels on Hong Kong Island are likely to recover before other markets where the market cycle will be deeper and longer', said Rhodri James, executive director of office services for Hong Kong at CBRE.

Savills' Mr Smith also noted that the completion of new buildings in Singapore will bring about a 'flight to quality' as tenants upgrade to better quality office space. This could lead to a fall in rentals and occupancies at less-prime Grade B office buildings.

And upon the completion of the new buildings, a two-tier Grade A office market could also rise, Savills predicts. Newer buildings are likely to command a premium in rents and capital values compared to older ones, the firm said.

However, capital values should not fall even as office rents fall as vendors are not likely to sell office space for lower prices. Savills said that it expects a 0 to 5 per cent rise in office values in Singapore.

This article was first published in The Business Times.