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City and market analytical reports covering emerging markets in the Asia Pacific region by global real estate solution provider Cushman & Wakefield
 

MarketBeat Asia Pacific Office Report - 3Q11

Oct 28, 2011
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MARKETBEAT
ASIA PACIFIC OFFICE REPORT 3Q11
A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION

3Q11
Economic Indicators

Economy Economic momentum within the region slowed in the third quarter on continuing uncertainty. Regional manufacturing activity was among the first to register the deceleration but at a more measured pace than in 2008. China's trade activities grew at its slowest pace in seven months in September but GDP growth remained resilient at 9.1%. India cut its economic growth estimates for fiscal year 2011 in light of the steady moderation in the manufacturing industry. Japan's key export sector has been buffeted by the strong yen and a slowdown in the global economy, thus complicating ongoing efforts to sustain a post-quake economic recovery while cutting the country's massive debt. Singapore expanded a meager 1.3% in the third quarter. The soft growth has prompted the Monetary Authority of Singapore to ease the monetary policy for the first time in more than two years in an attempt to slow the pace of appreciation of the Singapore dollar against other currencies and thus support growth. Meanwhile, Thailand is ratcheting down its economic growth forecast this year mainly due to the impact of the country's worst flooding in decades as well as greater external economic headwinds, while the Philippines unveiled a US$1.7 billion stimulus package to support economic activities. Most central banks in the region already have in place tightening cycles on hold due to heightened growth concerns. Indonesia was one of the first economies in Asia to lower interest rates in this economic cycle. While inflation rate has remained elevated across the region, inflationary pressures are receding in most countries. Overview Office market fundamentals remained solid through the third quarter, except for supply-heavy markets. The overall vacancy rate has remained low at 11.4%, albeit slightly higher from mid-year. Beijing and Hong Kong were the tightest office markets this quarter, posting ultra-low vacancies of 2.7% and 3.9%, respectively. Leasing has remained exceptionally brisk in Beijing, with take-up levels totaling over 5.0 million square feet (msf) this year-to-date after posting a record volume of 15.3 msf for all of 2010. To put this in perspective, this represents more than half of the take-up levels thus far in all CBDs in the U.S., which totaled 9.0 msf year-to-date. Similarly, leasing activity has remained relatively dynamic in Hong Kong, particularly in the Kowloon district. However, robust office completions in Seoul, National Capital Region, Hyderabad, Chengdu and Sydney have been instrumental for the modest uptick in Grade A vacancies within the region during the quarter. In Singapore, Grade A vacancies crept up for the third consecutive quarter; overall take-up rate still lagged behind the supply made available from recent office completions and secondary space vacated by tenants who relocated to these newly-completed buildings. Majority of the markets continued to show occupancy gains on the back of steady leasing activity. IT/ITeS and infrastructure sectors were the dominant demand

GDP Growth Australia China Hong Kong India Indonesia Japan Malaysia New Zealand Philippines Singapore South Korea Taiwan Thailand Vietnam
Source: Roubini Economics

2010 2.7% 10.4% 7.0% 8.4% 6.1% 4.0% 7.2% 2.5% 7.6% 14.5% -2.2% 10.9% 7.8% 6.7%

2011F 2.2% 9.1% 4.7% 7.3% 6.3% -0.7% 3.8% 1.1% 4.9% 4.1% 3.6% 4.9% 4.1% 5.7%

2012F 3.3% 8.3% 3.3% 7.6% 6.0% 2.0% 3.4% 3.0% 4.2% 3.2% 3.4% 4.7% 3.9% 5.1%

Grade A Office Vacancy Rate
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% Beijing Hong Kong Singapore Manila Melbourne Shanghai Adelaide Tokyo Shenzhen Sydney Ahmedabad Brisbane Perth Jakarta Bangkok Bangalore Taipei Seoul Hyderabad Hanoi Kuala Lumpur NCR Chennai Ho Chi Minh Guangzhou Mumbai Pune Kolkata Chengdu
Source: Cushman & Wakefield

Grade A Office Occupancy Cost
US$/sqft/mth 12.00 10.00 8.00 6.00 4.00 2.00 Hong Kong Tokyo Beijing Singapore Shanghai Sydney Perth Mumbai Melbourne NCR Brisbane Shenzhen Adelaide Hanoi Guangzhou Taipei Ho Chi Minh Seoul Chengdu Kolkata Bangkok Kuala Lumpur Jakarta Bangalore Chennai Manila Pune Hyderabad Ahmedabad
Source: Cushman & Wakefield

The above charts shows the vacancy and gross rents of Grade A offices in major Asia Pacific cities ş major cities are largely capital or key business cities

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MARKETBEAT
drivers in the third quarter, generating nearly 50% of transactions over 50,000 square feet (sf). Cognizant, which is India's third-largest software exporter by sales, remained the most active occupier. The IT firm leased another 270,000 sf during the quarter, after taking 270,000 sf in the first quarter and over 1.0 msf in 2010. After an unprecedented expansion over the past year, the financial sector has noticeably moved to the sidelines in the third quarter. The growing instability in the financial markets is likely to result in a further pullback among global financial firms with presence in the region. Grade A rents were up for most markets, even setting new highs in Beijing and Hong Kong. With occupier demand strengthening while supply remained muted, Grade A rents have set a new record of US$7.72 per square foot per month (psf/mth) in Beijing and US$10.53 psf/mth in Hong Kong. Notably, rents in Beijing rose another 24% from mid-year, marking the first time that Grade A rents have surpassed rates in Shanghai and other financial centers to be the third most expensive office market within the region. Rents across most districts in Hong Kong surged past their previous peaks in 2008, thus, retaining its number one slot as the most expensive office market globally. Such steep rent increases in Beijing and Hong Kong are inducing tenants to explore lower-cost options in adjacent districts for rental savings and potential expansion. Meanwhile, rents showed a modest correction among supply-heavy markets such as Mumbai, Seoul and Chengdu. In Tokyo, office rents have slipped to their lowest levels over the past ten years. However, rents in newer, top-grade buildings have stabilised or even increased in some cases, with the earthquake prompting some occupiers to gravitate towards high quality office facilities. Investment sales activity is holding up despite recent financial market volatility. Investment activity continued to flourish through the third quarter, with the year-to-date volume reaching US$250 billion within the region, compared with US$157 billion in the Americas and US$134 billion in EMEA. By comparison, sales volume totaled US$235 million over the same period in 2010. That number pushes 2011 on track to be another stellar year. Notably, 2010 had the highest total sales on record at US$352 billion. While investors continued to have preference for office and retail properties, they have also shown increased interest in logistics and hotel properties. Further, they continued to focus on primary markets such as Hong Kong, Tokyo, Sydney, Singapore, Beijing and Shanghai for reasons of micro-market fundamentals and/or to continue their exposure to Class A properties in relatively liquid markets. The continued investment activity suggests that the region has become a primary investment market. Outlook The Asia-Pacific region is well-positioned to weather a challenging global economy. While slower growth will be inevitable through 2012, overall macroeconomic fundamentals in the region should remain sound for several reasons. Firstly, healthy domestic demand and intra-Asian trade can offset export weakness from developed Western economies. Regional trade accounts for nearly 50% to 60% of export activity in all countries within the region.

ASIA PACIFIC OFFICE REPORT 3Q11

Secondly, though the open economies of Taiwan, Singapore, Hong Kong and Malaysia, as well as (to a lesser extent) South Korea, Thailand and the Philippines, make them vulnerable to external shocks, the region's economic juggernauts are expected to hold steady. Even the IMF expects continuing solid, albeit slower growth of 7% to 8% in large economies in emerging Asia next year. Case in point is China. While the region's largest economy is exposed to a U.S. and EU recession or slow growth through the trade channel ş with exports to both markets accounting for 40% of its total exports, we still expect any impact to be rather modest even through 2012. The export exposure to the U.S. and EU amounts to just about 11% of total GDP, and China has the means to cushion the impact from an export decline via fiscal channels. Likewise, India and Indonesia are expected to withstand global pressures given their larger domestic consumer bases. Thirdly, most countries in the region have ample room to stimulate growth through interest-rate cuts after tightening monetary policies in the past year or so to rein in inflation. Lastly, recent "nonrecessionary" data out of the U.S. and the promise of a "European solution" by early November should help ease business angst. Of course, our outlook will also have to be revised if we do enter a second phase of global economic contraction. Expect softer office market fundamentals with continued economic slowdown going into 2012. The magnitude of a fundamental slowdown in the property market would be a function of lease rollovers, upcoming supply and business confidence levels. While we believe 6% to 7% real GDP growth for Asia Pacific is relatively solid, the persistence of uncertainty could foster caution and lower the sense of urgency among occupiers and thus inhibit job creation. As a result, office demand could moderate to historic norms or even below trend across the region. This, in turn, should provide some modest relief to supply-constrained markets such as Beijing and Hong Kong. Meanwhile, robust construction in the pipeline in several cities such as Seoul, Mumbai, Chengdu and Guangzhou will ensure abundant space opportunities in those markets. In Tokyo, new supply boasting broader disaster-resistant capabilities will remain in high demand so vacancies are expected to be more apparent in less competitive buildings, especially those that do not even satisfy the basic anti-earthquake standards set in 1981. As regards to rental values, they remain correlated to GDP growth and inflation which should support stable to slightly growing rents within the region; hence, leases that are up for renewal through to next year should expect rents to remain significantly higher than the rates secured in 2009. Even so, we expect some owners in a few markets to be open to adopting a flexible pricing strategy in this uncertain environment, but to quickly become aggressive as signs of global economic resurgence re-surface and begin to tighten the office market once again. While the region will not be immune from unexpected shocks, office market fundamentals should remain relatively healthy in the near term and provide a strong underlying support to the investment sales market. As sentiments and macroeconomic fundamentals improve, we also believe that well let Grade B properties and prominent secondary markets will see improvement in capital flows due to relatively high yields and possibly acceptable risk profiles.

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MARKET/SUBMARKET Australia Australia Australia Australia Australia China China China China China China India India India India India India India India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam Vietnam

ASIA PACIFIC OFFICE REPORT 3Q11

MARKET/SUBMARKET STATISTICS FOR GRADE A OFFICES

VACANCY VACANCY VACANCY CITY RATE % (3Q11) RATE % (2Q11) RATE % (3Q10) Sydney 8.9 8.1 9.3 Melbourne 6.6 6.2 5.8 Brisbane 10.3 9.3 7.4 Perth 10.4 9.4 7.8 Adelaide 8.1 8.3 7.9 Beijing 2.7 4.5 11.8 Shanghai 7.0 8.8 6.8 Chengdu 31.8 26.1 27.0 Guangzhou 19.4 21.8 Shenzhen 8.7 9.7 Hong Kong 3.9 4.6 6.8 Bangalore 12.3 13.3 15.7 Chennai 16.8 17.9 20.0 Hyderabad 14.0 13.0 21.0 Kolkata 27.4 27.6 24.2 Mumbai 20.0 22.0 17.0 NCR 16.3 15.2 12.0 Pune 27.0 29.0 22.0 Ahmedabad 9.0 8.0 7.0 Jakarta 10.6 10.6 14.9 Tokyo 8.1 7.9 7.4 Seoul 13.6 8.8 5.4 Kuala Lumpur 15.0 16.8 12.0 Manila 6.6 6.7 7.1 Singapore 5.5 3.8 3.2 Taipei 12.5 12.7 15.7 Bangkok 11.4 11.3 11.3 Ho Chi Minh City 17.0 20.0 5.0 Hanoi 14.0 13.5 14.0 LOCAL CURRENCY* GRADE A QoQ Change YoY Change in Rents (%) in Rents (%) OCCUPANCY COST 68.75 0.0 -1.2 54.17 0.0 12.1 50.83 0.0 1.7 63.33 1.3 4.1 39.17 2.2 4.4 496.10 24.0 72.6 455.81 5.4 23.1 172.40 -0.8 11.6 235.64 3.5 316.60 5.6 82.04 3.4 31.7 85 0.0 6.3 65 0.0 8.3 46 -2.0 -2.1 120 4.3 22.4 300 -6.2 0.0 257 0.0 3.6 60 0.0 3.4 36 0.0 9.1 193,813 2.0 5.0 26,000 0.0 -3.7 29,023 -1.8 6.0 6.53 5.5 4.5 569 2.2 1.9 9.35 2.2 21.4 3,562 0.4 0.1 712 0.0 -0.5 822,785 -5.0 -20.0 780,124 0.3 5.8

UNDER YTD CONSTRUCTION CONSTRUCTION (sqft) COMPLETIONS (sqft) 1,145,354 1,200,735 2,481,639 388,964 1,396,745 0 1,532,941 71,279 602,778 15,069 14,875,947 893,404 13,475,413 5,144,262 30,246,588 2,400,352 21,072,303 4,184,933 9,199,935 0 2,482,300 957,514 15,540,000 1,852,251 11,193,000 1,256,500 2,870,000 3,820,000 6,930,000 2,670,000 21,090,000 6,390,000 16,460,000 4,200,000 9,150,000 5,200,000 3,210,000 480,000 3,731,309 1,034,412 10,678,305 3,082,758 16,130,699 4,273,477 12,949,251 1,280,687 7,273,185 298,860 4,176,713 2,697,000 2,700,000 577,000 1,926,040 1,199,740 11,840,300 1,408,156 12,900,000 721,181 IN USD* QoQ Change in Rents (%) -1.9 -1.9 -1.9 -0.6 0.2 26.9 6.2 4.4 5.0 7.0 3.3 -8.7 -8.7 -10.6 -4.7 -8.7 -8.7 -8.7 -8.7 -1.9 5.2 -0.4 1.4 2.5 -3.0 0.4 0.0 -5.0 -0.9

MARKET/SUBMARKET Australia Australia Australia Australia Australia China China China China China China India India India India India India India India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam Vietnam
*in psf per month

CITY Sydney Melbourne Brisbane Perth Adelaide Beijing Shanghai Chengdu Guangzhou Shenzhen Hong Kong Bangalore Chennai Hyderabad Kolkata Mumbai NCR Pune Ahmedabad Jakarta Tokyo Seoul Kuala Lumpur Manila Singapore Taipei Bangkok Ho Chi Minh City Hanoi

GRADE A OCCUPANCY COST 6.58 5.18 4.86 6.06 3.75 7.22 6.63 2.51 3.43 4.61 10.53 1.71 1.31 0.92 2.41 6.03 5.16 1.21 0.72 2.01 9.58 2.52 2.06 1.21 7.17 3.29 2.15 3.29 3.47

YoY Change in Rents (%) 6.1 20.3 9.2 11.8 12.1 83.3 26.7 16.0 31.0 -4.0 -2.1 -11.5 10.7 -9.6 -6.3 -6.5 -1.4 4.8 6.3 16.4 2.4 2.5 47.2 0.1 -1.1 -20.0 -4.0

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SIGNIFICANT 3Q11 NEW LEASE TRANSACTIONS COUNTRY CITY BUILDING South Korea Seoul Twin Tree Tower South Korea Seoul Mirae Asset Tower India Kolkata Unitech SEZ India NCR Oxygen SEZ, Tower C Philippines Manila Eton Two Cyberpod Centris India NCR DLF Silokhera India Pune Eon India Chennai ASV Chandilya India Hyderabad KRC MindSpace (Building - 20) India Hyderabad KRC MindSpace (Building -20) SELECTED 3Q11 SALE TRANSACTIONS COUNTRY CITY BUILDING Japan Japan Taiwan Taiwan Malaysia Taiwan Singapore Malaysia South Korea South Korea Tokyo Tokyo Taipei Taipei Kuala Lumpur Taipei Singapore Kuala Lumpur Seoul Seoul Mitsubishi Heavy Industry HQ Roppongi Hills Gate Tower Shin Kong Dunnan Building Cathay Dunnan Building Putra Place CBF Building RCL Centre Menara Multi-Purpose Samsung Finance Building HSBC Building SUBMARKET CBD CBD Rajarhat Noida Quezon City Gurgaon Kharadi Thoraipakkam Madhapur Madhapur SUBMARKET Minato Minato Dun S. Dun S. KL City

ASIA PACIFIC OFFICE REPORT 3Q11

TENANT Daelim Industrial Co., Ltd SK E & C Cognizant Sapient HP IBM Vodafone Aricent Verizon Data services Facebook BUYER

SQUARE FT 537,442 533,750 270,000 200,000 193,750 166,000 160,000 150,000 122,000 122,000 SQUARE FT 613,320 178,887 327,941 355,088 approx. 300,000 95,924 92,500 512,430 260,260 266,611

BLDG CLASS A A A A A A A A A A PURCHASE PRICE (US$ mil) $786 $464 $316 $282 $162 $152 $134 $118 $110 $90

Nippon Building Fund Mori Building Cathay Life Insurance Cathay Life Insurance Sunway Real Estate Investment Trust Dun S. Ting Hisin International Group Raffles Place Indonesia party KL City Malaysian Chinese Association Gangnam Samsung Investment Trust CBD Samsung Investment Trust

SIGNIFICANT 3Q11 CONSTRUCTION COMPLETIONS COUNTRY CITY BUILDING China South Korea Thailand India India China South Korea South Korea India China Guangzhou Taikoo Hui Seoul Signature Tower Bangkok Bangalore NCR Shanghai Seoul Seoul Chennai Chengdu Sathorn Square World Technology Centre DLF Cyber Terraces (Building No. 5 Tower C) Hongwell International Plaza Mirae Asset Tower 101 Pine Avenue Ramanujam IT City - Block Hardy Chengdu Spirit

SUBMARKET Tianhe District CBD CBD-Sathorn ORR (Sarjapur-Hebbal) Gurgaon Hongkou CBD CBD Taramani Nanyanxian

MAJOR TENANT HSBC Bank Burson-Marsteller Korea Co., Ltd. Cannon Ericsson NA Benesse SK E & C NA Sitel, CTS B-Ray Media, Dreamworks MAJOR TENANT N/A N/A N/A N/A N/A DBS (70,000 sf) N/A N/A N/A N/A

SQUARE FT 1,313,196 1,076,304 791,147 750,468 730,000 710,417 708,437 690,698 675,000 613,542 SQUARE FT 2,302,474 2,206,600 1,937,502 1,722,235 1,716,842 1,258,500 1,200,000 1,099,511 1,000,000 977,368

COMPLETION DATE 3Q11 3Q11 3Q11 3Q11 3Q11 3Q11 3Q11 3Q11 3Q11 3Q11 COMPLETION DATE 4Q11 4Q11 4Q11 2Q12 4Q11 2012 4Q11 4Q11 4Q12 4Q11

SIGNIFICANT PROJECTS UNDER CONSTRUCTION COUNTRY CITY BUILDING China China China China China Singapore India Vietnam India India Guangzhou Shenzhen Shenzhen Guangzhou Guangzhou Singapore Mumbai Hanoi Pune Kolkata Pear River Tower KingKey Financial Center 100 Shenzhen Stock Exchange Center The Pinnacle Lea Top Plaza Marina Bay Financial Centre Tower 3 Peninsula Business Park Keangnam Hanoi Landmark Tower Marvel Edge First Intelligent Place

SUBMARKET PRNC Luohu CBD PRNC PRNC Raffles Place Lower Parel My Dinh Viman Nagar Salt Lake Sector V

FOR INDUSTRY-LEADING INTELLIGENCE TO SUPPORT YOUR REAL ESTATE AND BUSINESS DECISIONS, GO TO CUSHMAN & WAKEFIELD'S KNOWLEDGE CENTER AT: www.cushmanwakefield.com/knowledge

This report contains information available to the public and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. For industry-leading intelligence to support your real estate and business decisions, go to Cushman & Wakefield's Knowledge Center at cushmanwakefield.com/knowledge ę2011 Cushman & Wakefield. All rights reserved. Cushman & Wakefield 3 Church Street, #09-03 Samsung Hub, Singapore 049483 Tel: +65 6535 3232 Fax: +65 6535 1028

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