Signs of stability in the Asian Office Market
According to a recent CBRE Report, the Asian office market showed signs of stabilising in the second quarter of 2009. However, companies continue to concentrate on reducing costs and tightening their real estate expenditures. Pressure to further reduce office space requirements nevertheless began to ease as the macro economic environment became somewhat calmer and, in the case of China, began to recover and improve, the report said. Most Asian cities either recorded a smaller negative net absorption or a mild increase in office requirements. Overall vacancy for Asian cities rose 60 bps quarter on quarter to 12.5% in the second quarter but the rate of increase slowed from 120 bps in the previous quarter.
Retaining existing tenants and attracting new ones remained the top priority for office landlords in Asia. In many markets, office landlords displayed a definite willingness to negotiate lease restructuring and offer more incentives to desirable corporate occupiers. However, leasing markets were sluggish overall and office rents remained caught in the down cycle.
According to the CBRE Asia Office Rental Index, overall office rents in Asia fell 6.7% in the second quarter, decelerating slightly from the 8.1% decline witnessed in the previous quarter as most cities underwent a milder rate of rental reduction. Since the outbreak of the sub-prime crisis, rents in leading cities including Tokyo, Hong Kong and Singapore and major commercial hubs including Delhi, Mumbai, Manila and Ho Chi Minh City have corrected by 30% to 47% from their peak.
It is expected that the rate of rental decline will ease further in the coming months, the report added. In India, the election of a new government and falling interest rates improved local business sentiment during the second quarter. Although there were some small signs of improvement, Mumbai, Delhi and Bangalore witnessed office rents slide further as buildings in the CBD saw an exodus of occupiers as corporates moved to alternative locations in order to reduce real estate costs.
Although the rise in demand for less costly premises bolstered office sub-markets outside the CBD, landlords of buildings in secondary office destinations struggled with the consequences of speculative overbuilding and were forced to increase incentives to recruit tenants.
The Bandra Kurla Complex and Kalina districts of Mumbai, for example, saw overall vacancy levels rise to 29.4%, while vacancy levels in Noida in the National Capital Region hovered at around 40%.
Commenting on the report, Anshuman Magazine, chairman & managing director, CB Richard Ellis South Asia said: “While the second quarter of 2009 observed some improvement in the office market with levels of enquiries going up, vacancy levels continued to remain high. The fall in capital values has also encouraged an increasing number of companies to explore and evaluate opportunities for buying rather than leasing the required office space. There is an improved level of activity in the sector but the markets are expected to remain soft in the short to medium term.”
Occupier activity in Tokyo was slower than expected in the second quarter. The majority of transactions concluded comprised either renewals in which existing occupiers achieved reduced rental costs in exchange for committing to longer lease terms, or corporate flight to quality in which companies opted for better locations without assuming higher rental costs. Very few new leases signed in Tokyo involved pure expansion, reflecting the present lacklustre demand conditions for prime office space. Several buildings completed in 2008 continued to display large pockets of vacancy while a number of older Grade A buildings also faced difficulty in maintaining satisfactory occupancy levels due to tenant downsizing, relocation to non-CBD areas and bankruptcy.
Although economic conditions in South Korea improved during the review period, demand for quality office space in Seoul continued to shrink. The average vacancy rate for Grade A offices climbed to 3.1% in the second quarter from 2.2% in the first quarter. Although landlords maintained the same face rents it became necessary for them to provide more incentives, including longer rent free periods, to retain clients, meaning that office rents in Seoul effectively eased.
The Chinese government’s implementation of its four trillion Yuan stimulus package continued to help bolster business confidence in China during the second quarter. In Beijing, prime office demand from overseas companies began to rise and a number of major leasing transactions involving foreign companies were completed. However, in Guangzhou it was domestic occupiers, particularly state-owned enterprises with monopolistic positions in certain industrial sectors, who comprised the main source of demand for prime office space. Both cities enjoyed a significant increase in net absorption over the second quarter. Elsewhere, Shanghai edged towards positive absorption as overall sentiment improved, although the city continued to record negative net absorption during the review period.
In Taipei, the commercial property investment market performed well in anticipation of closer economic ties with Mainland China, prompting landlords to raise their rental expectations during the second quarter. However, office occupiers seemed disconnected from the optimism displayed by landlords as they struggled to make ends meet under the present tough economic environment.
Overall demand for office space in Hong Kong remained weak during the second quarter, directly reflecting the fact that the city is home to a sizeable concentration of MNCs and international financial institutions that have been directly impacted by the current crisis. The Central CBD, which accommodates many overseas banks’ Asian headquarters, witnessed an extremely sharp quarterly decline in rentals, and rents remained generally soft across all office sub-markets. The rental disparity between buildings in Central and those outside the district remained significant.
Singapore is also home to the Asian headquarters of a large number of MNCs and consequently saw the further weakening of prime office demand during the quarter. Prime rents have now fallen 46.6% from the peak recorded in the third quarter of 2008 and occupancy rates will continue to face pressure from substantial new supply. Singapore has some 8.3 million sf of new office space in the development pipeline between now and 2013 and it seems certain that for the short term at least, supply will continue to outstrip demand.
Jakarta was the only city in Asia where rentals held firm, while Kuala Lumpur saw only a mild rental correction within the period under review. In Ho Chi Minh City the low rent strategy adopted by the newly completed Centec Tower, the first Grade A building to come on stream in a decade, drove average Grade A rents down by 28.8% from the previous quarter. Asking rents for other existing Grade A buildings held steady.
As anticipated in CB Richard Ellis’ first quarter 2009 MarketView, the Asia office occupier market is witnessing demand beginning to stabilise and business confidence turn slightly more positive as clearer signs of economic recovery emerge. However, the recovery Asian economies are currently experiencing is unlikely to translate into the kind of brisk corporate expansion witnessed during the 2005 and 2007 period.
Rather, it is anticipated that corporate occupiers will continue to adopt a conservative approach towards real estate decisions, especially those that would lead to an increase in operating costs. With respect to companies in Asia with operations which do not need to be situated in prestigious locations, many remain receptive to relocating these elements to lower cost premises, sometimes even opting for less mature business precincts in exchange for substantial savings.