Singapore's prime rents up 3% in the second quarter

Despite demand growth, Asia's increased level of office space enquiries didn't immediately translate into leasing deals.

Asia’s leading commercial centres recorded impressive growth in office demand in the second quarter of 2010 as the steady regional economic recovery encouraged multinational companies to reactivate expansion plans suspended earlier after the onset of the global financial crisis, according to a CBRE Resaerch report.

Led by strong growth in Greater China, overall office rents in Asia rose 2.1 per cent in the second quarter of 2010, ending seven consecutive quarters of decline. Overall vacancy declined by 90 basis points quarter-on-quarter to 10.9 per cent. The increased level of enquiry for office space during the second quarter did not immediately translate into leasing transactions. However, this suggests that the leasing market will remain active over the coming quarters.

“Within the second quarter, Greater China witnessed the largest upsurge in leasing activity with both multinational and domestic corporations quite active in taking up space in major cities. The total net absorption of prime office space in Hong Kong and first-tier Chinese cities, namely Beijing, Shanghai and Guangzhou, collectively accounted for three quarters of the regional aggregate in the second quarter,” explained Andrew Ness, Executive Director of CBRE Research Asia.

“Office rentals in these cities also recorded a larger magnitude of growth compared to other Asian cities. Singapore was another standout performer, with Grade A rents returning to growth after six consecutive quarters of decline,” added Andrew Ness.

Elsewhere across Asia, robust demand has as yet to induce significant hardening in rentals as landlords competed to fill space amid relatively high availability and, in certain markets, a large quantum of future supply scheduled to come on-stream over short- to-medium term.

Commenting on the outlook for the remainder of this year Andrew Ness said, “The Asian office market is expected to remain relatively muted for the reminder of 2010. Companies continue to be confident about the regional economic outlook, but concerns over a slower global economic recovery following the outbreak of the eurozone debt crisis will probably curtail aggressive expansion by multinationals over the short- term.”

Singapore
Leasing momentum in Singapore remained strong during the second quarter, partly due to pent-up demand from multinationals, which appear mostly to have recovered from the global financial downturn and who are now in a position to engage in cautious expand. Average prime rents grew 3 per cent quarter-on-quarter in the second quarter and vacancy across all micro-markets fell. Although 6.9 million square feet of new office space is scheduled to come on stream between now and 2015, a portion of existing office stock in the CBD will be redeveloped or converted to other uses, reducing the spectre of oversupply.

Japan
In Japan the Tankan economic survey confirmed that the country’s economic recovery was continuing and that businesses were regaining confidence. The turnaround in the economy encouraged some tenants to relocate to higher grade buildings or to those in more convenient locations. In some selected cases, companies expanded their footprint and moved to buildings with more space. However, overall demand for office space in Tokyo remained weak and rents were unchanged over the quarter.

Korea
In Korea, office demand in Seoul increased along with the improvement in corporate sentiment, but notwithstanding this fact, the average vacancy for Grade A office properties continued to climb as new space was added to the market. New buildings scheduled for launching in the second half were observed offering below-market rents to recruit tenants. Rental growth in Seoul is expected to remain limited in forthcoming quarters, although office leasing demand should remain stable as the economy is expected to hold up well.

Hong Kong
In Hong Kong, near full occupancy in premium Grade A buildings and the strong recovery in demand from investment banks drove CBD rental growth of 8.4 per cent quarter- on quarter. Office buildings in decentralised locations attracted strong interest from companies looking to relocate and consequently enjoyed a brisk rate of absorption. Looking ahead, large space users will be hard pressed to find available space citywide given the lack of current options and rents are expected to see further growth in light of the limited quantum of new supply in the pipeline.

Mainland China
In Beijing, all the major office submarkets recorded growth in rentals with citywide prime office rents climbing 4.1 per cent quarter- on- quarter. The Financial Street and Zhongguancun areas saw demand for prime office space outstrip supply although the CBD continued to record vacancy of over 20 per cent despite the rise in leasing activity. Improved business sentiment and new rounds of hiring also resulted in an active office leasing market in Shanghai. However, the substantial amount of future supply in the pipeline acted as a counterbalance to landlords’ becoming overly aggressive with respect to excessively raising their quoted rents. Elsewhere, the Guangzhou prime office market continued to recover during the second quarter. Encouraged by the buoyant leasing activity witnessed since the beginning of 2010 and the consequent decline in available space, landlords raised their rental expectations for office buildings that had earlier been launched with more conservative leasing strategies in the preceding quarters.

Taiwan
In Taiwan, despite brisk GDP growth in the first half of the year, office occupiers generally remained cost conscious. A significant number of Grade A buildings witnessed the downsizing or departure of SME tenants and hence prime office rentals remained flat.

India
Major Indian office markets continued to see growth in leasing activity but rentals were largely unchanged or showed only incremental growth as the quantum of vacant space outside the CBD area remained significant. The New Delhi office market enjoyed a strong revival with considerable leasing activity reported across the National Capital Region. However, similar to the previous quarter, rentals in the Grade A segment did not witness any growth. Mumbai reported an increase in enquiries for office space although the growth in interest failed to translate into immediate transactions. Leasing demand was largely driven by corporate consolidation and relocation to achieve cost savings. The Bangalore office market continued to stabilise although landlords were forced to remain flexible when negotiating with tenants as demand still lagged behind prevailing robust levels of availability.