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The Asian office market showed signs of stabilising in the second quarter of 2009 but
companies remained focused 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. Most Asian cities either recorded a
smaller negative net absorption or a mild increase in office requirements. Overall
vacancy for Asian cities rose 60 basis points quarter- on- quarter to 12.5 per cent in the
second quarter but the rate of increase slowed from 120 basis points 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 per cent in the second quarter, decelerating slightly from the
8.1 per cent 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 per cent
to 47 per cent from their peak. It is expected that the rate of rental decline will ease
further in the coming months.
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.
Singapore is 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 per cent 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 7.98 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.
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 per cent in the second quarter from 2.2 per cent 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 across all office
sub-markets. The rental disparity between buildings in Central and those outside the
district remained significant.
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 per cent, while vacancy levels in Noida in the National Capital Region hovered
at around 40 per cent.
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 per cent
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.
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