Real Estate Cycles Asia
Issue 27 - Feb 07

The overall economic outlook for Asia Pacific remains positive, even though its performance is likely to slow down in line with the global economy.

The World Bank forecasts that as a region, East Asia and Pacific is likely to grow 8.7 percent in 2007, down from 9.2 percent in 2006. In keeping with the positive
economic outlook, the Asian office market is believed to show a strong performance, for the beginning of this year.

“The different levels of maturity of real estate markets across
Asia-Pacific present significant investment opportunities. Cyclical
demand-side factors and relatively tight supply in most of the markets
are attractive to investors. Competition is only likely to intensify over the short to medium term with increasing cross-border capital flows from Europe, the US, the Middle East and within Asia-Pacific. This should result in further yield compression over the next 12 months” - Jane Murray, Asia-Pacific Head of Research, JLL

According to DTZ research, the number one most expensive business location in Asia and third in the world is Hong Kong, with office rentals as much as US$ 141 sqf per annum. Hong Kong is predicted to reach the peak of its cycle this year. Thailand’s office market is also reaching its peak, as a consequence of tight supply of good quality space and steady economic growth, resulting in steady price increase of office rentals. Singapore saw its rental growth paced though not matching in dollar values rentals in Hong Kong. DTZ reported that Singapore had the highest percentage increase with occupancy costs rising of 64.8 percent across all 134 locations surveyed by the company.

Mumbai also witnessed significant growth over the past 18 months, acheiving USD 88.2 sqf per annum. In a recent press conference, David Watt, Executive Director of DTZ said that he feels considerably bullish about India’s office market, as Mumbai posted the greatest occupancy cost rise of 34.2 percent, being among the top 10 most expensive office locations in 2006. Hanoi is also in the growth stage of its cycle with rents further rising due to thin office supply on the
market. Beijing is the only office market which remains oversupplied, with vacancy rates expected to rise even more. Beijing reached a contraction period in its cycle and will continue to remain as such throughout the whole of 2007.

Overall across the region, Grade A office demand remains high, and rents are going to follow suit.

india
Mumbai’s growing importance in the world economy is reflected by its top 10 ranking in DTZ’s World’s most expensive office locations. Alva To, Director of Consulting & Research, DTZ states that “Mumbai posted the greatest increase in occupancy costs of 34.2 percent. Its ranking climbed seven places higher from fourteenth to seventh, making it the fastest upward-moving city on the top ten list.” In fact, according to David Watt, Executive Director at DTZ, the only factors that could decelerate this process are the poor infrastructure and the tangled Indian
bureaucracy.

Ashok Kumar, Principal and Managing Director of CRESA Partners India, believes that government should take measures to reform laws and soften the heated market by releasing additional land. On the other hand, he believes that the corporate real estate market benefited tremendously from the government’s introduction of the Special Economic Zone (SEZ) Act and overseas REITs.

Over the years, Mumbai has emerged as a hub for corporate activity in the IT/ITES sector and this has been the key driver of commercial real estate in other cities
around India. “The traditional hubs for this [drive] were Bangalore, NCR-Delhi and Mumbai but over the years we are seeing the emergence of other cities, such as
Hyderabad, Chennai, Pune and Kolkata, as established contenders for attracting knowledge companies” says Uday Mathur, International Business, of Trammel Crow Meghraj (TCM).



Rent- increase by 34.2% (DTZ)
Uday Mathur, TCM explains that Mumbai’s rising prices could be a consequence of the steady increase of land prices resulting in builders transferring the cost to the end users. In his opinion, the growing emphasis on infrastructure development and the demand for high quality products that developers cash in on, have also been causes for rents spiking last year and further rising this year.



Demand- high
“Despite the speculation about the boom in the real estate market being the result of the artificial demand created by the investors, it is driven by end users” says Mathur.

FORECASTS:
Mathur says “some cities that will see vastly increased office sector activity thanks
to IT/ ITES in the future, include Chandigarh, Kochi Bhubaneswar, Thirunvanthapuram, Indore, Coimbatore, Ahmedabad and Jaipur.”

Ashok Kumar, Principal & MD, CRESA shares a similar opinion and predicts that the Indian office market will continue to grow due to high demand driven by the IT/ITES sector.

Hong Kong
Rent - continued growth
Research from Colliers International indicates an overall Grade A office rental increase by 10 percent YoY (Nov 2006-Nov 2007 percent Increase YoY). According to David Watt, Executive Director, DTZ, rents in Central have risen by
32 percent in a year with occupancy costs of HK$ 78 per sqf.

Vacancy Rate- very low
Continued to stay below 3.5 percent last quarter even though One Kowloon, a major development in Kowloon East, provided the market with 582,000 sqf brand new Grade A office in a non-core area, says Piers Brunner, Managing Director of Colliers International.

Supply- no supply in Central There will be no new supply in Central during 2007. Brunner comments “ By far, the supply constraint remained one of the
key challenges for the many tenants since only two office buildings came on stream last quarter” York House, of 115,000 sqf was the only completed Grade A office building in Central. Though is reported to have garnered rents of up to HK$140 per sqf.

Hong Kong is currently battling with London for the number one most expensive office rental market location in the world, and by the end of the year it could reign as number one.

Take up- decreased
DTZ research indicates that overall take up in Hong Kong dropped to 1.469 mil sqf in 2006, only half as much as the previous year. “Despite robust demand boosted by strong economic growth and a stock market rally, tight availability in all major districts has made it increasingly difficult for occupiers to find suitable office space, indicating that not all office demand can be translated into take –up”
says Alva To, DTZ’s Director of Consulting and Research.

FORECAST:
Andrew Ness, Executive Director, CBRE Research Asia says “Rents in Hong Kong
currently fall into the slowing growth quadrant. We believe rents will hit the peak very soon and start to edge down, particularly towards the second half of 2007. However, rents for the best quality space in Central will continue to increase in 2007 under still-strong financial-related demand and limited supply in the CBD areas. Moreover, Central is less affected by the new supply coming from the decentralised areas given the superior business environment and higher rent-paying ability of the tenants.”

York House, of 115, 000 sqf was the only completed Grade A office building in Central in 2006.

Alva To, DTZ’s Director of Consulting and Research says “thanks to a booming
financial market with a good number of new listings on the stock market this
year, the FIRE [finance, insurance, real estate] sector, and investment banks
in particular, benefited, and are therefore willing to pay a premium for prime office
space in the central business district.” Rents in Central, are forecast to edge higher in 2007 with continuing thin supply and strong demand from the FIRE sector, with most increases to be seen in the first half of this year.” During the DTZ conference it was also said that locations like Hong Kong depend upon macroeconomic movements such as how long China can retain its economic growth.

Piers Brunner, Managing Director and Head of Commercial, Colliers International said that at the moment Hong Kong is currently battling with London for the number one most expensive office rental market location in the world, and by the end of the year it could reign as number one. He said “demand from finance companies will remain robust and some vendors may adopt more aggressive sales strategies so we forecast a 10 and 8 percent growth in rentals and capital values over the next 12 months for this market.”



Vietnam (Hanoi)

Rent- further rising

Vacancy rate- very low

Supply- limited for the next two or three years

Matthew Powell, Commercial Leasing Manager, Chesterton Petty Vietnam says “the Hanoi market is very undersupplied with international standard office at
the moment. Occupancy rates are 99 percent for grade A and B. Many companies have been forced into using space which they wouldn’t necessarily want.” Powell
believes that even though there will be new supply of two grade A projects in the market this year, such as Pacific Place introducing 18,500 sqm with respective
occupancy cost of $34 per sqm and Opera Business Centre -approx. 5,000 sqm with occupancy cost of approx. $30 sqm, the short term situation regarding the
grade A market will remain unchanged.

FORECAST:
Looking ahead, Powell says that although there is more supply coming on stream within the next years, he believes that demand for grade A offices will remain strong as more companies will enter the Vietnamese market and those already present will expand their operations, as well as more Vietnamese companies beginning to use international standard office space.

Referring to the Grade A real estate cycle, Powell believes that it is at full occupancy. He also says that “supply will expand and prices will fall but not for some years.”



Singapore

Compared to its 2005 ranking on DTZ’s top ten most expensive office locations in Asia Pacific, Singapore climbed four places this year to number seven on
the list. This is due to a 64.8 percent increase in occupancy costs to USD 66.4, says Alva To of DTZ further stating “ the wave of financial institutions and other businesses setting up new global offices or expanding existing operations translated into higher demand in Singapore.” Watt, mentioned that
Singapore is still undergoing a resurgence after the Asian financial crisis and the dot.com bubble burst.

Rent- 64.8% increase

Vacancy Rate- low

Supply – there is a shortage of supply due to lack of
new completions in 2006

China (Beijing)

Supply- oversupplied

Rent- slight increase during December 2006

Vacancy- expected to rise due to developments coming at the end of 2006 or early 2007

FORCAST
Dorothy Leung, Director, Asset Services, CBRE Beijing says that the office market in Beijing is complex compared to other cities around the region with large
variations in the quality of buildind even in a quite close proximity to each other. The Chaoyang business district continues to be the most popular location
for businesses but still within that area there are buildings that are fully let and in demand while others remain empty. She emphasises that the quality of
the management and the landlord are important factors for companies establishing themselves or expanding in Beijing. She predicts that this situation will not change, quality buildings will attract quality tenants and building activity on the back of the 2008 Olympics may slow.



Thailand (Bangkok)

Supply – very limited

Rent - increased by 3 % Q on Q

Vacancy- low because already existing supply is being quickly absorbed

FORECAST:
Nexus research forecasts that the office real estate market should remain stable with high rents. However, office rentals in the Bangkok CBD are approaching
a cyclical peak, says the October 2006 Nexus office market report. Furthermore, it predicts that “change in office rent for Year 2007 is approximately 8 to 10 percent year on year.

The November 2006 Colliers office market research suggests that “Due
to the projection of a limited supply over the next two to three years and
sustained economic growth, prime office rents are expected to grow
21 percent to 840 Baht per sqm per month over the next 12 months.”



Macau

Industry expert Marcos Chan, Associate Director of Research, Jones Lang LaSalle says that Macau office market is a very small one, catering mainly for local
companies and government departments.

Supply- very limited

Vacancy Rate- High

Demand- is picking up
Chan says “The current development of the underlying economy lays a solid platform for office demand in Macau. However, given the relatively smaller floor plate requirement, the vacant space will take time to be absorbed.”

Chan says this is a result of Macau’s reinforced position as a tourist city in the region and its emergence as a world-class gaming city in Asia. and general anticipation that gaming, MICE (meetings, incentives, conferences and exhibitions) trade and tourisim will rise exponentially on the back of increased air connections and the large scale hospitality projects coming on line to cater to the. Chan highlights “the deregulated gaming industry has brought a higher level of economic activities to Macau” pointing out that they are not only limited to the gaming and tourism industries. “In fact professional firms, banks and
other companies engaging in the business services industries are putting their footprints on Macau.” Chan attributes higher demand for office space- used for recruitment and training centres- to the recent opening of new casinos and hotels. However, unlike Hong Kong or other tier I cities, Macau’s office market does not cater for company headquarters. As a result, demand for floorspace size is relatively small, says Chan. RFP

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