Asia Pacific’s commercial real estate market will continue to dive, plateau and recover depending on the domestic context in the next few years. It is widely acknowledged by market analysts that Asia will rebound faster and more confidently than its European and North American counterparts, in part because of international investment patterns, the rate of GDP growth in China, India and upstarts like Vietnam, and Asia’s volatile track record of peaks and troughs over a shorter period of time compared to older, more established markets.
Regardless of which era or region, the property arena is consistently steered by the same drivers — supply, demand, rents and capital values — which shift dynamics depending on the current needs of developers, property owners, tenants and buyers. These determine the fates of Asia’s nuclei, which in turn help to answer the query: What can commercial landlords and occupiers expect today and tomorrow? Landlords in high-vacancy markets will need to relinquish their seats of power to reach potentially symbiotic arrangements with occupiers. Tenants should also be savvy by knowing what to ask for in leases, knowing when to relocate and knowing when to stay.Across the Region
According to Jeremy Sheldon, Managing Director Markets (Asia Pacific), Jones Lang LaSalle (JLL) at the Asia Office Space Congress 2009 (HK), office rents in Beijing, Shanghai and Singapore will continue to drop until 2011 due to critically high levels of supply. “Vacancy levels are high across the board,” he adds. “The region came off an 18 year high and will travel on a downward trend for five to eight years.” Landlords in Hong Kong and Singapore who have consulted with JLL are unsure of the situation, as a result “landlords are including a lot more confidentiality clauses in their leases than before. The market is potentially flexible. There are no ‘typical terms’ anymore so ask and you may receive.” He explains, “landlords are feeling the credit crunch and are often involved with other side businesses beyond real estate. Ultimately, they want to retain quality tenants.” So if you have established a good rapport with a landlord, approach them for an early renewal.
Supply is driving vacancy hikes across the region; Singapore is the most severely inflicted, followed by Shanghai, Tokyo, Hong Kong then Sydney, says Sheldon. Simply put, “there is no sign of increasing rents since there is no sign of increasing demand,” he adds, “So expect flat-lines or plateaus for all rates across the board.” Good news for tenants who want to relocate or consolidate to a better unit. As for subletting, it presents some competition to landlords but “is not as prevalent as initially anticipated when the market bottomed out.” He urges tenants to “take advantage of the opportunity to reduce space by negotiating with landlords” and if tenants opt to relocate “there are lots of incentives on the table such as cash and money for fitouts.” Furthermore, companies should seek early renewal to secure a longer-term contract with low rent. As for commercial real estate trends, Sheldon mentions “tenants are exploring Alternative Workplace Strategies (AWS) and outsourcing FM services to cut costs with real estate and operations.” John Forrest, CEO of Corporate Solutions (Asia Pacific) at JLL, corroborates this observation. “MNCs hire corporate solutions consultants as a cost-effective means of doing business, since the outsourced agency can now provide a broad and comprehensive range of services including transactions, project management and facility management, and the successful ones retain contracts because of consistent and end-to-end service delivery,” he says.Shanghai
In a report published by Jones Lang LaSalle in 4Q 2009, entitled The Emergence of Shanghai’s Decentralised Office Market, “an increasing number of new buildings, which are located just outside the CBD, are being built to high-quality specifications and are quickly becoming conveniently accessible.” Today, “half of the existing tenants in decentralised Grade A buildings were former CBD tenants” and it is predicted that “many CBD tenants will be considering a decentralisation strategy.” This new supply “represents the first generation of Grade A quality space outside the CBD that offer[s] high-quality specification suitable for large multinational occupiers.” While “the decentralised office market comprised only 331,000 sqm of space” in mid 2009 “this small market will grow to nearly 1.8 mil sqm by end-2013 with 14 more new decentralised Grade A projects slated to enter the market in 2009 and 2010 alone.” Infrastructure works are in progress to facilitate smooth linkages with the CBD. “Better integration with the city centre means that decentralised tenants can reap the benefits of lower occupancy costs while maintaining solid employee retention.” In addition to decentralised supply, “Shanghai will still have substantial new supply enter the CBD in the next five years. Supply levels will be high enough to limit growth in rents in the CBD.” So while landlords cannot look forward to elevating rents soon, there will be little need to slash rents to attract tenants.
Will properties just beyond the city centre lure enough companies with its lower rent? “On average, decentralised space is currently 31 percent cheaper than CBD space… the current discount will widen to around 50 percent” in 2010 and 2011. As for other benefits, “decentralised landlords are increasingly prepared to offer longer rent-free periods and fit-out allowances to attract the right tenants.” The report purports “cost-sensitive occupiers will also recognise that today’s relatively low CBD rents will not persist forever and view decentralised offices as a solid long-term strategy.” Then again if you’ve always wanted an office in the CBD, and don’t mind moving in a few years, now is the time to move in.
Singapore
In the next few years, this Asian city remains plagued by over supply and high vacancy rates — good news for tenants, but not ideal for landlords and developers. A recent report issued by Colliers explains, “The oncoming supply of more than 2.5 mil sqf will continue to weigh on the office market in the short term,” impacting office rents which will “continue to see erosion in 1H 2010, although this is likely to be capped at 5 percent.” The worst is not quite over (for landlords). “Rents of Grade A office space in the CBD were hit hard by the global financial crisis, eroding by a substantial average of 46.2 percent in 2009 alone, and more than 50 percent from the peak in 3Q 2008.” The report predicts, “The current office down cycle could bottom out in 2H 2010, barring adverse external shocks.” Tenants interested in relocation or a longer term contract should seek to negotiate now.
Capital values also took a blow: “For the whole of 2009, the average capital value of Grade A office space in the micro-market had fallen by 33.2 percent, and almost 40 percent from the peak in 3Q 2008.” However, “Leasing activities picked up pace in 4Q 2009, fuelled by relocation deals that were motivated by flight to quality amid rents at more than 50 percent discount to 2008 peak, new leases prompted by business planning for the upturn, and renewals.” International companies are not evacuating, instead they maintain positive outlooks for 2010. “Businesses are likely to start planning for the upswing by embarking on expansion plans.” In support, early 2010 observations find “hirings in the financial sector are making a comeback. Among others, Barclays was reported to be looking to boost its headcount at its retail and commercial banking unit, to 750 by 2010, from 350 in October 2009.”
Hong Kong
Despite global economic upheaval, Hong Kong enjoys low vacancy rates in the CBD paired with steady and even climbing rents. New property blocks in Kowloon and Quarry Bay also offer Grade A office supply to businesses seeking an economic alternative. However, these favourable conditions emerged after a period of dramatic change. CB Richard Ellis’ (CBRE) Hong Kong Property Market Outlook for 2010 states, “Grade A office rents dropped 18.7 percent year-on-year (3Q 2008 to 3Q 2009) with average rents of $40.40 per sqf (HKD)” and its prices hiked 67.3 percent during the same period.
Vacancy rates on Hong Kong Island “increased from 3.4 percent at the end of 2008 to 5.57 percent at the end of 2009”, a mild ascent compared to other cities in the region. These rates are expected to climax at 7-8 percent during 2010. “This is partly driven by the relocation of occupiers to more cost effective options in the Kowloon decentralised markets, some surrendered space being returned to the landlord’s direct vacancy, and the reduction in leasing velocity, compared to 2008.” However decentralised markets, currently pegged at 18.5 percent vacancy, only deliver “a limited number of buildings that can provide contiguous space options for large occupiers.” John Davies, Senior Director of Office Services at CBRE says, “We are aware of at least eight large requirements at present, and it is unlikely that all of these can be accommodated within the existing supply, which we anticipate will partly mirror the undersupply problem on Hong Kong Island.”
Rhodri James, Executive Director of Office Services at CBRE says, “Some districts will be more exposed than others as anchor tenants downsize, or relocate out of these districts. However, on a positive note, the quantum of surrender stock has reduced considerably, as tenants have either successfully sublet surplus space, or are anticipating internal demand, due to increases in headcount.” Therefore, tenants are already firming up their lans in regards to future needs but options to downsize and relocate remain available. “Some landlords will come under pressure to reduce rental levels to retain key anchor tenants, whilst others will have to offer considerable lease incentives to attract new tenants to their portfolios. This will once again restrict rental growth during the first half of 2010, however once landlords have reduced their vacancy exposure, we are likely to see rental growth quickly coming through,” James added. As for supply, Hong Kong is in good shape with little coming online on Hong Kong Island, “this will have a positive impact on some of the landlords and districts that have lost major occupiers to Kowloon,” states the report. Overall, the region’s office market leaves room for flexibility within leases, attractive offers in decentralised districts and stabilising rents across the board.
