Signs of Improved Sentiment in Office Market in Q4 2013

Prospects for APAC Upturn Largely Dependent on Financial Sector

*The Japanese translation of this release was disseminated in Japan on the date above. Please note that the original version of this release was announced in English on February 13.

February 13, 2014, Hong Kong — Demand for office space in Asia Pacific strengthened in Q4 2013 and in the second half of 2013 overall. The office sector showed signs of improvement in Q4 2013, particularly in the media, technology and pharmaceuticals sectors. However, prospects for a significant upturn in demand largely rest on the health of the financial sector, which remains subdued as a result of new regulations and cost-cutting continuing to inhibit expansion. Domestic financial institutions are still more upbeat than their multinational counterparts.

• Net absorption for H2 2013 totaled 15.2 million sq. ft., an improvement on 14.1 million sq. ft. recorded for H1 2013, which was also the lowest half-yearly total since the market began to recover from the global financial crisis in Q1 2010. Most markets saw an uptick in demand with more leasing enquiries and transactions recorded in China, Japan and Singapore in particular.
• The CBRE Asia Pacific Office Rental Index recorded a slight increase of 0.24% quarter-on-quarter in Q4 2013 as demand improved in a number of key markets. Grade A rental growth during the quarter was driven by the strong performance by several Southeast Asian markets including Jakarta and Ho Chi Minh City. Singapore also recorded its first rental increase—a jump of 2.1% quarter-on-quarter—since Q1 2012 as many tenants went into expansion mode.
• Overall vacancy in Asia Pacific declined from 10% in H1 2013 to 9.3% in H2 2013. Vacancy was down in 15 markets, up in nine and stable in one. In Asia, vacancy continued to decline in Q4 2013, falling to 9.1%, as all markets with the exception of Beijing, Hong Kong and Guangzhou recorded a decline in vacancy. Vacancy in the Pacific region continued to increase due to the steady flow of sublease space in Australian markets.
• New supply in Asia Pacific for the year 2013 totaled 35 million sq. ft. NFA (net floor area). The figure was below the five-year average and market the lowest annual volume of new stock completed since 2006.

“Occupiers generally continued to focus on small to medium size requirements but the completion of a few more strategic leasing transactions for larger spaces witnessed in a few markets towards the end of 2013 was a positive sign,” said John Falkiner, Managing Director, Transactions, Asia.

Outlook for 2014

Whilst the Asia Pacific office market was characterized by weak net absorption and a low level of new completions in 2013, the gradual improvement seen in Q4 is expected to continue into 2014 in line with stronger regional and global economic growth. However, overall rents in Asia Pacific are expected to continue to display little movement in the opening quarters of 2014. Rental growth in the likes of Tokyo, Singapore, Auckland and some Southeast Asian markets will be offset by declines elsewhere, particularly in Shanghai, most Australian markets and some submarkets in India.

Overall vacancy may increase in 2014 with 86.4 million sq. ft. NFA of new supply scheduled to be completed. Oversupply pressure in certain markets will also be high. Much of the new supply will be in non-core areas, tightening the availability of prime space. Since some projects will likely be delayed whilst others are designated for strata-titled sale or for use by owner-occupiers, rents in oversupplied markets such as Guangzhou and Shenzhen are expected to remain stable.

“We see MNCs increasingly facing competition from regional and domestic companies when attempting to secure space in prime locations. Competition is expected to intensify given that the forthcoming oversupply is in non-core areas,” said Jonathan Hsu, Director, Asia Pacific Research. CBRE expects competition for prime space to intensify, particularly in Hong Kong, Singapore, Beijing and Bangkok, where vacancy is at or close to historical lows.

“Despite the slight improvement in occupier demand witnessed over the quarter, we expect multinationals to generally remain cautious towards expansion. They will typically default to the renewal of leases and will continue to develop cost-effective solutions as cost reduction and cost containment is still a focus for many companies. However, occupiers in Singapore, Tokyo and Auckland will need to speed up decision making, given that the availability of prime space in these markets is tightening and rental growth is picking up,” said Mr Falkiner.

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