Office Rents And Occupancy Costs in Asia Pacific

Asia’s major office markets remained robust in the third quarter of 2007. Vacancy rates remained low at 5% or less in key Asian financial cities including Tokyo, Singapore, Hong Kong and Shanghai. With the low availability and the strong demand from multinational corporations (MNCs), Grade A office rental appreciation continued in Asia.

However, office rents rose at a slower pace in CBDs since some tenants moved to non-core areas upon lease renewal. More anchor tenants have also committed or are planning to relocate their back offices to secondary business districts for lower occupancy costs.

Despite the increasing new office supply in leading Chinese cities including Beijing, Shanghai and Guangzhou, the steady increase in rents has been attributable to strong demand and the high quality of new projects. Pre-commitment activity in new buildings as well as expansion or relocation into premium offices with modern facilities by MNCs was noted. Other major Asian cities such as Taipei and Seoul also saw the expansion and relocation of MNCs continue to play the role of key demand drivers. In India, demand was especially robust in the IT sector since Bangalore, Mumbai and New Delhi remain preferred destinations for IT occupiers.

Australian & New Zealand GDP
Demand growth across most Australian property markets remains strong. This is particularly true for retail, which is responding more to good job growth and tax cuts than it is to higher interest rates. It is also true in office markets, albeit to a lesser extent, with good job gains reflecting high profits as well as a recent lift in Australian output growth.

The GDP growth rate for Australia over the year to June 2007 was 4.3% and is expected to increase to around 4.6% by the end of 2007. Growth in GDP for New Zealand was 2.2% for the year to June 2007. While the economic rebound in early 2007 has flattened out somewhat, conditions remain supportive of continued moderate growth. Positives include sustained high commodity prices, increased government stimulus to households, continued business and government investment and capital and infrastructure expenditure.

Tight market conditions continued to drive up rents in Japan’s capital in the third quarter. The steady upward trend in rents made more cost-conscious occupiers with expansion requirements look to more affordable locations, Grade A vacancy remained low at 1.3%. However, the vacancy rate for all-grade office buildings in Tokyo’s 23 Wards was also low at 1.7%. Given the continued shortage of prime office space and the persistence of strong demand, rents are expected to continue to trend upward for the foreseeable future.

The recent uncertainty in global financial markets has had no discernible impact on Singapore demand for office space. Demand for quality office facilities remains broad-based, though the financial and insurance sectors were predominant among those with larger space requirements.

With rents at record levels, there is increasing tenant resistance to rental hikes, and occupiers are more prepared to explore lower cost locations and consider relocating to business parks or high-tech space. Several sizeable pre-commitments by companies in the banking and insurance sectors are expected during the final quarter of 2007.

Hong Kong
Strong expansionary demand and insufficient supply combined to keep vacancy rates of prime Central buildings at historic lows while pushing core Central office rents to new highs. Hong Kong’s economic outlook is positive, and its close economic ties with China should underpin further expansion by banking and financial institutions.

In the present situation, MNCs have little choice but to decentralize and/or split their operations to meet cost requirements and space demands, thus providing an extremely strong pre-commitment response to new prime office buildings nearing completion.

Sydney CBD
Leasing activity remained strong in the first half of 2007 in the Sydney CBD office market, with net absorption reaching 87,200 square meters. Solid positive net absorption is forecast to continue during the second half of 2007.

Many tenants have taken advantage of leasing incentives still on offer, expanding from locations already within the CBD. Market rent growth has picked up significantly, driven by the strong demand and falling vacancy rate. Prime net face rent growth for the year to September 2007 was 11%. Reduction of incentives continues and this is likely to drive further growth in effective rents in the short- to medium-term.

Wantanee Khamkongkaew is an independent author evaluating and commenting on leading International Property Consultants in Asia and Greater China, especially CB Richard Ellis.

Article Source: Office Rents And Occupancy Costs in Asia Pacific