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Exciting times in Asia Pacific office property market, according to consultants

The latest Asia Pacific Office Index shows that aggregate net take up across major Tier I markets was at a similar level to the previous quarter, but showed a marked year on year improvement of over 30%.
‘The global comparison shows how the traditional Asian centres have outpaced the world in their recovery. At the same time, we can see a strong re-emergence of ASEAN as a force in Asia, with Jakarta now topping the table in both rental and capital growth as it reaps the benefits of the recovery. These are exciting times for Asia Pacific Office markets,’ said Jeremy Sheldon, head of markets in Asia Pacific for Jones Lang LaSalle.

‘The pace of recovery in Asia Pacific, and the influence of China, is demonstrated by the rental growth being experienced by Hong Kong as companies worldwide strive to locate themselves at the centre of the action,’ he explained.

‘As a result, Hong Kong is now one of the most expensive markets in the world. Continued strong demand combined with a shortage of office stock has pushed Central Hong Kong rents up, although they are still 10 to 15% below the last peak prior to the global financial crisis,” he added.

The Japan earthquake has not materially affected occupier market conditions elsewhere in the region, the index shows. Vacancies are trending down in many cities, and office rentals remained on an upswing across most markets in the quarter.

Of the 26 featured office markets, 16 saw an increase in net effective rents during the quarter, while for the remainder rents stabilised or recorded small residual declines. Aggregate rental growth moderated slightly as a result of weakness in Japan, with an average quarter on quarter increase across the region of 2.5%.
It shows that Jakarta recorded the largest quarterly rental growth of 9.5% as landlords became more aggressive in raising rentals due to strong net take up and declining vacancy.
‘Recent leasing activity has further demonstrated the breadth of the recovery in the Jakarta office market, with pre-commitment levels for new developments at robust levels ensuring that the overall absorption in 2011 will almost certainly be a record,’ said Todd Lauchlan, country head for Jones Lang LaSalle Indonesia.
‘We are also forecasting strong rental growth over the balance of 2011 as the vacancy level continues to fall and demand continues to improve on the back of a strong economy. It is worth noting that in US dollar terms we are only now seeing rents recover to pre Asian crisis levels of 1995-1997 with Jakarta remaining one of the cheapest places in the world to lease office space,’ he explained.

‘We therefore anticipate a period of catch up as rents move closer to a level more in line with the economic cost of development in this rapidly emerging city,’ he added.

Rents in Hong Kong followed closely with a further 9.2% increase on the back of a tight supply situation and solid demand by the financial sector. Rents in Singapore grew by 7.9% quarter on quarter, underpinned by a temporary shortage of space. Rents in Shanghai and Beijing grew by 6 to 7%, with the result for both markets being driven by strong spatial demand from MNCs and domestic corporates. In the twelve months to the end of March 2011, Hong Kong delivered the strongest rental performance, with growth of 36%.

Net effective rentals in Tokyo declined by 1.5% as gross rents continued to fall while rent free periods remained unchanged following the recent disaster.

In a few other markets where tenant demand remained weak, rents have either stabilised, for example Taipei, or are seeing further declines, such as in Seoul and Bangkok. Average rents in Australia and New Zealand generally saw moderate movements, both positive and negative during the quarter. Perth recorded the largest quarterly increase of 5.9%.

Investment activity remained buoyant in 1Q11 and sentiment in the region outside Japan has not been dented by the crisis in that country. Almost all major markets outside of North Asia saw either stable or increasing capital values. The largest quarter-on-quarter increases were recorded in Hong Kong and Jakarta, increasing by 13.1% and 11.0%, respectively. The Mainland Chinese cities of Shanghai, Beijing and Guangzhou were next highest with quarterly increases of 7 to 8.5%.

The report concludes that although markets across the region continue to be dominated by local investors with the biggest deals involving Asian buyers, analysts expect more interest from global investors keen to participate in growth in the region.