Prime office markets have positive outlook in Asia Pacific region

Prime office rents in most markets in the Asia Pacific region are expected to rise or remain steady over the coming 12 months with China and Japan performing better than expected, according to the latest index figures.

Overall rents increased by 1.2% quarter on quarter and 0.6% year on year as at the end of the second quarter of 2017 in 20 markets tracked by the Knight Frank Asia Pacific prime office rental index.

The increase in the index was the result of rising rents in 15 of the markets over the quarter, with rental declines experienced in two of the markets tracked and over the next year rents are forecast to rise or remain steady in 15 cities.

The report explains that a pickup in global trade and domestic demand has negated geo-political risks to a certain extent, thereby providing a strong foundation for the Asia Pacific prime office markets.

Bengaluru continued to attract occupier interest from the IT sector with a 4% increase quarter on quarter and 7.1% year on year but office project delays have plagued New Delhi in the first half of 2017, leading to an all-time low in new completions. Coupled with a stable pace of absorption, vacancies have dropped whilst rentals have risen.

Mumbai witnessed a fresh office supply of close to 530,000 square meters in the last quarter, causing vacancy rates to rise by 2% and in Beijing, domestic corporations were involved in most of the leasing activities, especially those from the finance, internet and high tech sectors.

Rents and vacancies remained stable in Shanghai in the second quarter, with new supply concentrating in Pudong. No new offices were added to the Guangzhou and Taipei markets, where vacancy rates dropped and rents rose further. The report says that the former will see limited supply of less than 300,000 square meters in 2017 while the latter is witnessing a relocation trend from Grade-B to Grade-A offices.

In Hong Kong, as prime rents continued to edge higher, cost-conscious tenants are expected to continue to relocate to other areas such as Wong Chuk Hang. Seoul experienced a 3.5% increase in rents supported by healthy absorptions even with new supply and relocation of several large occupiers.

While a positive economic growth bodes well for the Tokyo office market, the looming supply influx for the next few years is set to turn the market in favour of tenants. Despite delivering around 92,000 square meters of new prime supply, Singapore’s prime rents held steady in the second quarter of 2017 after a two year decline, owing to continued demand from sectors such as technology, co-working and professional services.

In Jakarta, rents remained unchanged but a downward trend is expected for the next 12 months due to a huge incoming supply. Prime rents in Kuala Lumpur had been sliding for a year, coupled with creeping overall vacancy rates. In the mid to long term, the city’s improving public transport may drive demand for offices near the new transport lines.

Bangkok experienced its first rental decline in close to three years, having slid marginally by 0.2% in the quarter. Given a limited supply, a rising trend may resume for the remaining of 2017, the report explains.

In contrast, more than 132,000 square meters of office spaces were added to Manila’s office stock in the second quarter which contributed to a significant rise in vacancy rate. A new Grade-A office building boosted the overall office stock in Phnom Penh by close to one fourth, exerting upward pressure on both rents and vacancies.

All four Australian cities performed strongly with rising rents and dropping vacancy rates in the second quarter. Perth continued its rental recovery track, aided by minimal new stock. Sydney prolonged its rental growth for 18 consecutive months, albeit slowing to 1% compared to 1.4% in the first quarter.

A landlord favourable market condition in the Melbourne CBD has led to a gradual drop in incentives over the past few quarters. With an improving market sentiment and tight supply, Brisbane office market is set to extend its acceleration for the next 12 months.