Prime Office Rentals Continue to Face Upward Pressure amid Ongoing Supply Squeeze

PRLog (Press Release) – May 20, 2008 – The first quarter of 2008 saw Tokyo’s average prime office rent (exclusive of common area management fees) ease 0.8% q-o-q to JPY 59,000 per tsubo (US$16.66 psf) per month. The Grade A vacancy rate increased 0.3 percentage points q-o-q to 1.5%. Nevertheless, the single Grade A building completed during the period, which provided 1.1 million sf of net leasable space, opened at full occupancy.

In Singapore, the office leasing market remained active in the first quarter of 2008, with renewals and relocations dominating activity. Banks and financial institutions continued to show keen appetite for expansion space and business support and professional services entities such as law and IT firms also added space. Demand again exceeded available supply and landlords commanded high rents on rent reviews/lease renewals due to the absence of alternatives for occupiers. This could serve to maintain rents at artificially high levels for the next 12-18 months, and further rent upside is likely in selected buildings.

Despite the volatility in global capital markets, two factors are likely to prevent a major correction in Hong Kong office rents. These are the robust underlying fundamentals in the Grade A office market, with limited quality stock, minimal vacancy and a notable crunch in new supply for Hong Kong Island over the next three years; and the increasing importance of China and Asia to financial institutions due to the region’s comparatively robust growth prospects in the current economic environment. Though growth slowed, overall prime office rent still surged 9.1% q-o-q to HK$71.74 psf (net effective) per month.

In Seoul, the annual rent adjustment at the beginning of the year and competition for space in the tight office market accelerated the pace of rental growth during the first quarter. Average Grade A office rent soared 4.56% q-o-q to KRW 22,118 psm (US $2.07 psf). Though vacancy in the Gangnam sub-market increased due to new supply, the average vacancy rate dropped to another record low. The lack of available Grade A office space in most submarkets amid rising expansionary demand is expected to drive further rental increases.

In China, Shanghai’s office market remained buoyant, recording high levels of both new supply and take-up during the first quarter of 2008. The year has already seen a substantial amount of new supply, with seven office premises adding a total of 325,000 sm (3.5 million sf) to the market. Driven by keen demand from both the service and manufacturing sectors, active pre-leasing has cushioned the impact of the surge in supply.
In Beijing, the office leasing business was relatively slack in the first quarter, as is usual during the Chinese holiday season. Take-up dropped 37% q-o-q to 1.47 million sf. The 3.42 million sf of new supply coming on stream during the quarter drove the vacancy rate up 1.8 percentage points to 17.9%. Rental growth slowed to 1.4% q-o-q, with average rent ending the first quarter at RMB 200.4 psm (US$2.66 psf) per month. In Guangzhou, relocation and expansion to newly launched quality buildings dominated office leasing activities over the first quarter of 2008.
Approximately 2.59 million sf of prime office space, contributed by two Grade A and one Grade B premises, was added to the market, driving the overall vacancy rate to 19.4%.

In India, supply remained limited in CBD areas while facilities in secondary locations have attracted office occupiers due to superior availability. In New Delhi, prime office rentals remained stable in the first quarter of 2008 and are expected to remain at current levels or increase marginally. New supply is expected to continue to be dismal in the CBD while the supply situation in the peripheral areas of Gurgaon and Noida is set to improve as a significant amount of supply is set to enter the market over the remainder of 2008 and into 2009. A number of leases in Mumbai’s CBD, Nariman Point, expired in the first quarter, with most tenants unable to renew office leases at the prevailing rentals. A number of these occupiers moved to more affordable areas. While this has not yet impacted rentals, the Nariman Point CBD is unlikely to witness substantial growth in rents through the rest of 2008.
Supply remained limited in Bangalore’s CBD and the situation is expected to persist throughout 2008, driving further increases in rental and capital values.
Turning to South East Asia, Sentiment in Bangkok’s office market improved slightly towards the end of the first quarter of 2008, with indications of a tentative recovery in demand, primarily from local companies. In Kuala Lumpur and Manila, the prime office leasing market continued its positive momentum during the quarter, sending rentals to higher levels. Ho Chi Minh City saw the completion of a number of new office developments, however with the exception of the Grade B Sacombank Building (total GFA 165,550 sf), the new developments were small Grade C buildings with floor plates below 3,300 sf.