Wednesday, December 17, 2014

Region’s Absorption to Reach a Seven-Year High in 2015

The relatively firm economic backdrop could aid a broad-based rebound in office demand in the majority of the top 30 cities tracked in Asia Pacific in 2015.


New supply, totaling an estimated 93 million square feet, will hit its first peak next year but driven by healthy demand for office space, overall vacancy rates is estimated to edge up by just 0.6 percentage points. Consequently, the availability of quality space and expanding corporate activity will propel absorption to increase by over 20%, from an estimated 62 million square feet in 2014, to reach a seven-year high next year.  Highest absorption gains are expected in Beijing, Tokyo’s 5 Central Wards and Shanghai among core markets; and Bangalore, Manila and Chengdu for emerging markets.

Absorption gains in the emerging markets, where over 70% of new supply next year will be in, are expected to be most pronounced. Established growth drivers such as information technology, business process outsourcing, and professional and business services making bigger market plays at a local level will in turn also fuel the expansion of other supporting office-using sectors.

Silversea, Singapore
“The competitive cost structures in emerging Asia will remain a linchpin of a thriving outsourcing industry and fast-rising manufacturing hubs outside of China,” said Sigrid Zialcita, Managing Director of Research for Asia Pacific, Cushman & Wakefield. “In addition, the commitment to structural reforms will progressively squeeze inefficient industries and pave the way for the growth of stronger institutions across many sectors needed to drive leasing activity.”

Indeed, the IT outsourcing sectors in the global BPO hubs of India and Manila will drive a large part of the demand. With businesses infused with renewed confidence after the elections, leasing activity in India has picked up significantly. While Flipkart’s three million square feet in Bengaluru and Tata Consultancy’s 1 million square feet of space in the capital this year are done deals, activity is expected to gain further momentum as companies like Accenture, Standard chartered and a Consulting Major are reportedly on the hunt for spaces totaling over a million square feet each.

Manila’s booming BPO sector is also fueling growth in other sectors, fostering the rise of an increasingly tech-savvy generation that embraces social media and e-commerce, which tech giants are anxious to tap into. Google, which opened its office in Manila last year, is also looking to expand its presence as it takes advantage of the talent base in the country to grow its back office services.

In the core markets, Beijing and Shanghai will account for the bulk of absorption, as a teeming supply pipeline will bring relief to occupiers there. High-quality office premises continue to see strong demand from domestic companies as the tertiary sector continues to expand its proportion of the economy. Internet finance companies have also emerged to be a major occupier of office space in these cities.

Having been a strong pillar of leasing activity in the region in 2014, new tech companies are expected to remain active in the coming year. Overall, the Asia Pacific region remains the growth leader globally, which will allow economies to breed a wealthy consumer base, especially in emerging countries, and the critical mass needed to sustain the sector’s long-term viability over the next decade.

“There are good reasons to believe that the immense upside potential of the new technology sector in Asia Pacific will be sustained, with a young population base, particularly in emerging markets, that are more open to innovative mediums, rising domestic consumption, urbanization fostering the rise of the mobile commerce platform,” said Miss Zialcita.

Tokyo will also remain in the spotlight in 2015 with strong demand from occupiers to remain intact amid an expanding corporate sector.

“Japanese companies are performing very well on account of the weak yen”, said Miss Zialcita. “While the continual uptrend, still at an early stage, could be patchy, recent policy moves indicate that growth remains Japan’s top priority and key to instilling confidence among corporates, which in turn, will be critical to sustaining the current positive momentum in the property markets,” she added.

Supply additions will be keeping pace with the rising trend in demand through 2015 except in Chengdu, Kolkata, Ahmedabad, Delhi NCR, Pune and Hanoi, where vacancies will remain in excess of 20.0%.

Single-digit rent growth is expected across the top 30 cities tracked in the region for 2015. For core markets, Grade A rents are forecasted to rise another 1.0-2.0% per annum, with Tokyo posting the highest rent growth on the back of ultra-low vacancies. Rents in Singapore are expected to move up once again in a favorable supply/demand environment in the prime office market, but the pace will be slower relative to the 10%.

For emerging markets, average rents are expected to be flat to declining in the majority of the emerging markets as rampant supply will restrain landlord leverage. Jakarta, Shenzhen, Manila, Chennai and Bangkok will buck the trend with above-average annual rent growth of 3.0-5.0%, though this pace represents the third consecutive year of slowdown for most of these markets.

“For the region as a whole, 2015 will be another year of diminished rent growth expectations. Still, while annual rent increases have moderated since 2011, tenants with three-year leases will, by and large, face slightly higher renewal rates in 2015. On average, rents will be up 6-7% for core and 7-8% for emerging markets from 2012,” elaborated Miss Zialcita.

COUNTRY SNAPSHOTS

China
Massive projected new supply is the defining trend in China’s key office markets. Across the Shanghai, Beijing, Chengdu, Guangzhou and Shenzhen markets, anticipated supply of high quality office premises in CBD areas in 2015 stands at a record high of about 30 million square feet, followed by a further 45 million in 2016. As such, developers are keen to deliver as quickly as possible before the bulk of supply hits, which should see a potential for huge relocation deals. High quality office premises continue to see strong demand from Chinese companies.

“Tenants will likely hold off on office relocations now and wait until new supply comes on in 2016, to examine their long term occupancy requirements. There will be a flight-to-quality over the next several years as tenants upgrade from aging buildings that do not have the infrastructure to support their needs,” said Michael Stacy, Executive Director, Tenant Advisory Group, China.

India
The top eight cities have a robust supply pipeline of nearly 35 million square feet for 2015. This supply is likely to favor tenants, presenting them a variety of quality options to choose from and negotiating power in the short term. Still, overall vacancies, which is estimated to rise by about 0.1-0.2 percentage points to 18% next year, will likely be contained as demand will be fuelled by companies in the IT-ITeS, banking, financial services and insurance sectors (BFSI), pharmaceutical and manufacturing sectors due to an anticipated improvement in India’s economic scenario. Bengaluru will lead with an estimated 11.1 million square feet of net absorption against a supply pipeline of 14.4 million.

“Further improvement in occupier sentiment is anticipated next year as occupiers pursue growth strategies. Relocations and consolidations will also continue with occupiers increasingly adopting innovative workplace strategies to attain efficiency in operations and costs. Rents in suburban and peripheral locations will be largely range-bound next year due to steady infusion of supply but are expected to start firming thereafter as the supply pipeline shrinks,” said  Ritesh Sachdev, Executive Director, Tenant Advisory Group, India.

Japan
Tokyo will remain in the spotlight in 2015. Recent policy moves indicate that growth remains Japan’s top priority with the recent downturn expected to bite less-than-expected. The initiative is aimed at reclaiming Tokyo’s status as a major international metropolis by creating an environment conducive to attracting foreign corporations. Consequently, we believe the office market recovery, while patchy at time, is still in an early stage and will improve gradually.

“Office market rents are forecast to rise further and landlords are bullish on realizing rent increases for lease renewals and relocations. Renegotiating occupier leases now includes rent escalation protection clauses as an optimal strategy. The current market is compelling occupiers to actively implement workplace strategies as a means to control occupancy costs. Tokyo will remain a destination for global capital through the 2020 Olympics,” said Todd Olson, Executive Managing Director, North Asia.

South Korea
In the first half of 2014, leasing activity in Seoul were driven by relocations, as corporations move into newly completed office buildings at expanded footprints. Still, average office vacancy rate in Seoul increased due to the influx of new supply in the second half of 2014 and current market conditions will require landlords to continue offering incentives. However, the supply spigot will decrease across all major districts in 2015. We should see the current market tilt in the landlords favor in the next two years.

“Despite the additional office building supply, the net take-up increased significantly with all major districts experiencing an improvement as large-scale tenants expanded. For these reasons, rent rolls will likely increase while rent-free periods will be cut back. Tenants should renew their contract periods on a long-term basis to save costs. Occupiers should take advantage of the prevailing market conditions to negotiate new leases,” said Tony Yoon, Senior Director, Head of CIS

Hong Kong, Singapore
With high occupancy costs and limited availability in both of these markets, the overarching theme in both of these markets is for tenants to better utilize their office space to keep costs down. Dwindling options in Singapore core business districts will continue to push activity towards fringe and suburban locations in 2015. On the upside, the Shanghai-Hong Kong Stock Connect scheme has the potential to lead to a huge increase in capital flows both into and out of China while Singapore is expected benefit from the implementation of the Asean Economic Community.

“Major office occupiers have fast-changing needs when it comes to their talent and cost requirements. They need flexibility to adjust their space needs without significant difficulty or costs. The quality and location of office space is becoming a critical factor, particularly in a rental market upswing. Prime rents in Singapore are forecast to increase in 2015 although at a slower pace than in 2014 as market anticipates a strong supply in 2016. With new supply located in distinctly different micro-markets, this will reduce any dramatic rental fluctuations,” told Toby Dodd, Managing Director, Singapore.

“It remains to be seen when office demand will recover due to occupiers’ focus on containing costs and the slower economy. However, we expect the office vacancy rate to remain relatively stable at around 6% through 2016. There will be limited new supply of office space for lease and rents will not fluctuate significantly. More supply and better demand in 2017–18 will likely stimulate tenant activities,” said John Siu, Managing Director, Hong Kong.

Developing Southeast Asia
Jakarta and Manila will continue to be attractive to corporate giants hoping to gain a foothold in the region. Among the favorable demographic shifts is the rise of an increasingly tech-savvy generation that embraces social media and e-commerce, which tech giants are anxious to tap into. Google, which opened its office in Manila last year, is also looking to expand its presence as it takes advantage of the local talent base to grow its back office services.

“The 2015/2016 new office supply pipeline will finally bring some relief to corporate occupiers, as well as provide more expansion and relocation alternatives to meet market demand, which has remained tight,” said David Cheadle, Managing Director, Indonesia.

“The strength of the O&O industry makes the office market an attractive investment choice for both local and foreign investors. Capital values have posted steady growth in Manila’s core business districts, vacancy rates remain low and the continued expansion of reputable multinational companies make the office sector an attractive option,” said Joe Curran, General Manager, the Philippines

Australia
Signs are also pointing up in some cities in Australia. While a still weak resource sector is expected to keep vacancies in Perth at record-high levels, improvements in the financial markets and other non-mining sectors already spurring office demand somewhat in other cities. This comes at an opportune time, given that significant new supply that is attractively priced will come on stream in Sydney and Melbourne in 2015.

“The green shoots in tenant demand, which we commented on at the beginning of 2014, have now transpired into a sustained rise in the demand for office space. With over 400,000 sq.m. of space requirements currently in the Sydney market alone, it is clear that tenants are taking a positive view of the outlook for business conditions within Australia,” told David Woolford, Managing Director, Australia.

Cushman & Wakefield is the world’s largest privatelyheld commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the worlds major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 professionals. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has nearly $4 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.

Source: Cushman & Wakefield Research

No comments:

Post a Comment