JLL Q4 Asia Pacific office rental market update and outlook
The pace of decline in rents in markets which have experienced falls throughout the year is slowing, for example in Hong Kong and Singapore.
Jones Lang LaSalle’s markets experts have shared their expectations for the grade A office leasing markets in Asia Pacific in the final quarter of 2012. The pace of decline in rents in markets which have experienced falls throughout the year is slowing, for example in Hong Kong and Singapore. Sydney is expected to remain flat, with a small decline of 0.5 percent forecast in quarter four, whilst Melbourne is expected to see a slightly larger decline of between two to four percent. Elsewhere rents are expected to remain flat in the final quarter of the year.
Jeremy Sheldon, Managing Director, Markets Asia Pacific Jones Lang LaSalle commented: “The office leasing markets in Asia Pacific have been slow because companies, in particular financial services, have been playing a waiting game due to the uncertain economic outlook. There are still deals happening, especially in consumer goods, BPO and pharma, but activity in the first three quarters of this year is down about 25 percent on last year.”
He continued: “That said, with the continued cost focus, the larger transactions that have happened in these market conditions are proving opportune with companies taking advantage of incentives and locking in rentals that fix costs at a competitive rate for the next few years. We see a potentially slow start to 2013, but as the economic picture starts to clear and political changeover is cemented, the middle of the year onwards could look very much more active, especially for South East Asia.”
Beijing: Rents are expected to remain relatively flat in Q4 2012. Domestic and global economic uncertainty coupled with record high rents has led to a slowdown in demand in 2012. A small number of tenants handed space back to the market last quarter leading some landlords to be willing to be more flexible in rental negotiations in order to attract high quality tenants and to maintain current occupancy rates. Some resistance to record high rents is now being felt and projects in decentralized areas, offering more competitive rental rates are attracting some tenants away from traditional business districts.
Delhi: no rental growth expected in Q4 2012. Moderate demand levels and price-competitive suburbs have resulted in stagnant rents in the secondary business district (SBD) for the past eight quarters. This stable rental trend is expected to continue as the suburbs offer lower rents to occupiers who are exercising caution and cost control measures. Rents are expected to remain stable in all micro markets of South Delhi. As buildings are nearing completion in the DIAL sector, more supply is hitting the market and keeping changes in rents in other micro markets minimal. Vacancy increased in IFCI Tower (Nehru Place), Punj Essence (Nehru Place) and GESCO (Nehru Place).
Ho Chi Minh City: rents are expected to decline by 1.5 percent in Q4. With the impending opening of new buildings such as Times Square and Le Meridien, plus existing vacancy in current stock, rentals will continue to show modest declines. We are now seeing reductions in rents in new buildings that were completed over the last few years. This pattern will continue in 2013 as supply continues to outstrip demand.
Hong Kong: rents expected to be 2 percent down in central in Q4 and flat overall. Pressure remains in Central as demand is generally limited to smaller occupiers, therefore is absorbing little of the existing large vacancy. Vacancy remains in key buildings that are under pressure to secure tenants and landlords are willing to reduce rental expectations to encourage transactions. Activity levels remain small but steady outside of Central in a low vacancy environment, which has allowed rents to grow in each recorded sub market.
Jakarta: rents expected to grow by 7 percent in Q4. Demand remains strong driven by growing sectors such as banking, insurance, oil & gas, professional services and telcos. Existing tenants have very limited options and available space is reducing. DBS Tower, which will be completed early next year has only few floors still available. We expect this rental growth to be sustained for some time, albeit at a slower rate as some demand is shifting to lower quality buildings and into non-CBD locations.
Manila: rents expected to grow 2 percent in Q4. Rental growth has remained stable throughout 2012 and continues to be supported by sustained demand from the offshoring and outsourcing (O&O) sector. At the same time pre-commitments in future office developments continue to improve.
Melbourne: rents expected to decline between two and four percent in Q4. Demand for office space has slowed, and consequently incentives have increased as landlords seek to stimulate demand. Development activity is continuing, albeit slowing, despite pre-leasing criteria softening to around 50 precent of net leasable area. Companies are very cost focussed so are often choosing to renew leases rather than move. Major Australian banks downsizing, creating sublease opportunities.
Mumbai: After remaining stable in the first three quarters of 2012, the gross rents in the SBD Bandra Kurla Complex sub-market are expected to increase marginally by 1.9% during Q4 of this year. This slight increase in rents is in spite of cautious occupier sentiment and is due to the superior quality of office buildings that have come onto the market in this quarter. In addition investor-owners are willing to lease space at a marginal discount compared to developers, thus keeping the rental appreciation modest.
Seoul: no rental growth expected in Q4 2012. Leasing activity in the Seoul office market has been unusually flat in Q4. The market typically picks up pace at this time of year, following the summer break and Chuseok (Korean thanksgiving in late September). There is no shortage of space and landlords continue to offer attractive incentives, so we think this lull reflects general uncertainty in the economy across Asia-Pacific and gloomy conditions globally. Another trend which may be dampening leasing activity is landlords of existing buildings offering very competitive terms to tenants approaching lease expiry, meaning companies are more likely to renew than relocate.
Shanghai: no rental growth expected in Q4 2012. Concerns about the economic outlook mean that companies are remaining conservative around their relocation and expansion plans and the majority of deals are renewals. Although some economic indicators have shown a stabilization trend and even signs of an emerging recovery, this view has not yet become the consensus among the decision makers within multinational corporations. Domestic companies are more active than MNCs. In light of the low level of deal flow and inquires, most landlords continued to take a wait-and-see attitude which has kept office rents flat; we do not expect to see any rental growth in Q4.
Singapore: rents expected to decline 2.5 percent in Q4. Demand in the CBD remains relatively weak due to a lack of activity and growth amongst financial institutions, though there have not been any noteworthy examples of contraction in this sector. The Grade A CBD vacancy rate currently stands at 10.3 percent which is unlikely to change appreciably in the next two to three quarters. Likewise, we expect rents to show a very moderate decline in the short term. The decentralised office market and business parks are seeing a fair amount of activity at present; most of the major new leasing deals this quarter (i.e. over 50,000sq ft) are taking place outside of the CBD.
Sydney: rents expected to decline 0.5 percent. The low demand and low supply environment will see market tick along with little real change in the short term. Companies upgrading and/or centralising to the CBD will likely be a catalyst for recovery in sentiment at the prime end of market. Once we see more sustained demand and confidence return, we think that incentives will track back to levels seen in late 2011.
Tokyo: rents are expected to grow by 1 percent in Q4. A flight to quality has helped reduced vacancies in the Grade A market to 3.1 percent in the this quarter and has created demand for new developments due for completion this year, although vacancies remain in many of these developments. Low vacancy rates in key sub markets and pre commitments for new Grade A developments have provided landlords with a greater sense of confidence and we saw rents increase by two percent in Q3 2012. However the outlook remains uncertain given the slowdown in the local and global economies and significant rental growth is not expected in the final quarter.
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