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Strong Demand Continued Across Asia - Rental Rates Rising at a Slower Pace

Oct 12, 2007
Robust demand outstripping tight availability and rental appreciation continued to be the dominant characteristics of Asia's major office markets during the second quarter of 2007.

However, rental rates showed signs of rising at a slower pace in a number of regional commercial hubs as potential tenants have begun to resist the rapid rent escalations of the past few years. Increasingly, companies are accepting secondary business districts in order to find more economical space alternatives. While huge demand from Multi-National Corporations continued in China's markets, rental growth in leading Chinese cities remained steady amid supply peaks that will persist over the short-to-medium term. India presents a different picture, with the continued supply drought in major central business districts driving further increases in rentals.

In Tokyo, occupiers seeking to upgrade and/or those with expansion requirements remained the primary drivers of the market in the second quarter of 2007. With landlords' unwilling to compromise on rental levels, Grade A vacancy edged up 20 basis points to 0.9 per cent as floors became available in a number of large-scale buildings. However, the vacancy rates for all-grade buildings in both the city as a whole and the central five wards declined 10 basis points, ending the quarter at 1.7 per cent and 1.8 per cent, respectively.

While leasing activity in Singapore was dominated by the expanding financial and banking sector in the first quarter, demand in the second quarter was more broad-based, with tenants from the shipping, energy, oil trading, law and IT sectors all taking up space in the core CBD.

Demand for high quality office space in Hong Kong showed no signs of abating in the second quarter of 2007 and vacancy rates remained at historic lows for prime buildings in Central. Pre-commitment interest in new office buildings nearing completion across Hong Kong remained strong.

Office leasing activity in China's leading cities continued to be underpinned by strong demand from MNCs. In Beijing, take-up increased significantly in the second quarter, reaching 1.5 million sq.ft. while rental levels remained largely stable. Keen demand for Shanghai prime office space has pushed rents higher, with Pudong registering a faster rate of increase due to robust growth in the financial industry.

In Taipei, some tenants continued to relocate to better quality space, with activity concentrated in the Xinyi-Jilong area. The lack of new supply over the past seven quarters is likely to give landlords in Grade A buildings further bargaining power in negotiations.

Robust economies in South-East Asia underpinned generally buoyant office markets. Office rents in Manila continued to record impressive growth driven by the expansion of the business processing outsourcing (BPO) sector. However, overseas BPO firms have become increasingly apprehensive about the continued appreciation of the peso, though it has yet to deter them from expanding their offices in the Philippines.

In Kuala Lumpur, Ho Chi Minh City and Bangkok, no new prime office space was released onto the market in the first half of 2007. Given the tight supply, Kuala Lumpur recorded 17.8 per cent annual growth in rentals on the back of continued expansion of MNCs and existing occupiers.

Space was last available in Ho Chi Minh City's five Grade A office buildings at the end of 2005, and both local and overseas companies are now feeling the scarcity of supply even more acutely, though some pent-up demand will be met by the wave of Grade B and C space that will be launched in the second half of 2007.

In Bangkok, weak demand continued to pressure rentals in the second quarter even as supply tightened. The situation is unlikely to improve over the near term if the current political and economic uncertainties continue. In Jakarta, the launch of several new office projects in the first half of 2007 spurred leasing activity in the CBD and a number of secondary office districts, especially South Jakarta's TB Simatupang.

Looking ahead, demand drivers are expected remain strong in most of Asia's office markets while tenants are expected to be less aggressive in bidding up rental levels further over the remainder of the year. Meanwhile the brisk development of office submarkets in secondary districts and business parks throughout the region will provide alternatives to companies seeking to occupy larger floor plates and/or contain occupation costs.
About the Author
Wantanee Khamkongkaew is an independent author evaluating and commenting on leading International Property Consultants in Asia and Greater China , especially CB Richard Ellis.
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