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Lease incentives being offered due to weak office demand in Asia Pacific

Despite initial signs of stabilization in various financial markets around the world in 1Q 2009, the volume of imports/exports and investment in the private sector of the region continued to see further consolidation.  The slowdown of economic activities represented the major threat to occupational demand for office space in the region.

Thus, tenants opted for a number of measures during their lease renewal in 1Q 2009, including negotiation for lower rentals, downsizing of floor area requirement, downgrading to second-tier development and/or a combination of the above.  Meanwhile, the number of tenants planning to sub-let their excess space due to the contraction in business requirements saw a notable increase. 

"Seeing the weakening occupational demand, many landlords were willing to offer competitive lease terms to new tenants such as rent free periods or cash subsidies towards fit-out costs," noted George McKay, Managing Director, Corporate Services of Colliers International, Asia Pacific Region.

In what is becoming a more competitive market to maintain and attract tenant demand, average office rentals in the region registered a drop of 4% quarter-on-quarter (QoQ) during 1Q 2009.  Comparing different locations in the region, Hong Kong and Singapore saw double-digit rental declines of 15.4% QoQ and 21.8% QoQ respectively in 1Q 2009.

On the sales front in 1Q 2009, institutions and real estate investment funds, which have been the most common buyers of large properties in the past few years, continued stayed on the sidelines or waited for better market entry points to arise over the coming months.

Meanwhile, in 1Q 2009, there were a moderate number of owner-occupiers and private investors interested in buying quality office developments and they mainly targeted mid-priced assets. 

"Due to the sustained global economic consolidation, the occupational side of the real estate market in Asia Pacific is expected to remain relatively weak in the coming quarters of 2009.  However, the anticipated beginning of relaxation in banks' lending attitudes towards commercial real estate is expected to serve as a positive stimulus to the current downturn," said George.  "Therefore, the pace of decline in both rental and capital values is expected to taper off during the second half of 2009."