HONG KONG (Aug 18): Amid the Covid-19 pandemic, office markets in Asia Pacific (APAC) will favour tenants for up to three years, according to Collier’s Asia Pacific Office Markets: 1H2020 Review and Five-Year Outlook report released today. The report gives an overview of demand, supply, rent and vacancy rates in the APAC office market space for 1H2020, as well as the outlook from 2020 to 2024.
Colliers Asia research executive director Andrew Haskins said in a press release: “In aggregate, APAC office markets are under pressure from a combination of muted demand and high planned supply. The prospect of conditions favouring tenants for up to three years gives occupiers the chance to lock in good deals in markets like Hong Kong’s Central, Shanghai’s New Bund and Shenzhen’s Qianhai district.”
“Investors should focus on popular occupier centres with above average rent growth over five years, such as Singapore, Bangalore, Melbourne CBD and Auckland,” Haskins said.
According to the report, aggregate absorption in the 19 APAC office markets that Colliers tracks closely fell 56% q-o-q in 2Q2020. “While demand appears to be picking up in China, we predict a drop of 41% to 4.03 million sqm in 2020,” the report said.
“Average annual absorption over five years should be close to the 2019 level of 6.82 million sqm. Office markets that held up well in 1H2020 include the seven major Indian cities (most notably Bangalore (Bengaluru), Seoul and Singapore, while Hong Kong SAR, Tokyo and Sydney showed negative net absorption,” it added.
In terms of supply, Colliers foresees heavy supply of office in APAC in 2020 and 2021. “Aggregate new supply in 2Q2020 equalled about three times the aggregate take-up. Indian cities were the chief drivers of new supply, with Melbourne CBD also strong,” the report said.
“Reflecting heavy planned supply in 2H2020 in the leading Chinese and Indian cities, led by Shanghai, Bangalore and Dehli — NCR plus high supply in Tokyo, Seoul and Melbourne CBD, Colliers expects aggregate APAC supply of office space to be 2.8 times absorption in 2020. Medium term supply should be high in China (notably Shenzhen), Bangalore, Delhi — NCR and Australia (notably Sydney CBD). Across APAC, Colliers expects aggregate new supply to exceed aggregate absorption over the three years from 2020 to 2022. Supply should move back into balance with demand thereafter,” it added.
Colliers added that the higher incentives softened net effective rents across APAC over 1H2020. “This should continue over 2H. For 2020, weighted average APAC net effective rent should fall 5.0%,” it said.
According to the report, the rising importance of office stock in China (where rental recovery may lag the rest of APAC by a year due to high supply) and India drives Colliers’ forecast of a 0.7% average annual rent decline over five years.
However, Colliers predicted that the medium-term rental outlook in popular occupier centres is brighter. “Singapore should achieve five-year average annual growth in rent of 3.3%, while Bangalore, Melbourne CBD, Taipei and Auckland should achieve five-year average annual growth of 2.2% to 3.0%.”
“Landlords in many markets will be competing for a limited demand pool and landlords will likely attempt to differentiate their product offering by increasing attention to health and safety, advanced mechanical systems, and wellness and environmental credentials,” it said.
Meanwhile, the vacancy rate of offices in APAC is poised to rise for the next two years, according to Colliers. “The aggregate APAC vacancy rate stood at 11.4% at end-2Q. Reflecting heavy supply in China and India, Colliers expects APAC vacancy to peak at 14.5% at end-2022. This should ease to 13.3% by the end of 2024.”
“For occupiers, this means a sustained period of nearly three years over which many APAC markets will favour tenants. This situation presents an opportunity for occupiers to lock in deals in attractive markets such as Central in Hong Kong or New Bund in Shanghai or Qianhai in Shenzhen now. It also provides a means for occupiers to determine and execute their long-term accommodation strategy and business vision in each of the cities within the region,” the report said.
Colliers foresees the capital values to remain stable, with positive signs in the medium term. “Investment sales of APAC offices fell 48% y-o-y in 2Q but rose 17% q-o-q due to a pick-up in Shanghai, Beijing and Singapore.”
“Despite the pressure on overall investment levels, in general, capital values have yet to fall sharply and yields are little changed. Colliers expects modest yield softening over 2H and 1H2021. In the long run, the APAC office markets with the greatest potential for capital appreciation should be those offering the highest rent growth, such as Singapore, Bangalore, Melbourne CBD and Auckland,” the report said.
Colliers added that investors will likely assign a premium to buildings with very high standards of hygiene and sanitation, and wellness certifications. “This implies that demand will remain firmest for prime grade office space.”