Office Market Insights

August 26, 2022 / By ,

Asia Pacific office leasing buoyant despite COVID-19 outbreak in China

Leasing activity was mixed but despite headwinds, sentiment remains broadly buoyant compared to a year ago and volumes were up 17% y-o-y in 2Q22. Weakness in Mainland China, caused by a wave of COVID-19 infections, was offset by strength in India and aggregate Asia Pacific volumes were in line with pre-pandemic levels as a result. Mainland China volumes were down sharply y-o-y as fresh COVID-19 measures restricted leasing activity in Shanghai. Move-ins, fit out work and site inspections were all on hold due to containment measures first implemented in March, and sentiment remained downbeat due to the prospect of additional lockdowns. Outbreaks in Beijing and Guangzhou during part of the quarter saw Mainland China leasing volumes drop 66% y-o-y. However, some transactions were observed, mainly from financials and tech companies, despite lockdowns. Leasing activity in India was up sharply in both y-o-y and q-o-q terms and the IT/ITeS sector was again a key driver of leasing demand. Flexible space operators were also a key source of leasing activity as the popularity of managed offices has been growing with end users. Financials were also active in the quarter. Australia volumes were down 24% y-o-y. Tenants continued evaluating office requirements and some have consolidated causing a rise in sub-lease vacancy in Melbourne. Sydney volumes were also down, although some preleasing activity was recorded at new developments. Brisbane was a bright spot in an otherwise lacklustre quarter as several large deals were finalised; however, confidence was waning given economic headwinds. Seoul leasing activity was down in both q-o-q and y-o-y terms due, largely, to a lack of available space. For example, the vacancy rate in Gangnam dipped below 1%. Tokyo leasing activity was up 21% y-o-y as the economy has been improving; manufacturers, tech and financials were all active.

Asia Pacific rents stable despite supply and vacancy pressures

While market conditions were mixed and the regional vacancy rate remained elevated at 13.8% in 2Q22, a flight to quality provided support to Grade A office rents in many markets. As such rents trended up 0.2% q-o-q (-0.5% y-o-y) for the second consecutive quarter. Robust occupier demand and a tightening vacancy rate gave Seoul CBD landlords the confidence to slash incentives and sharply raise net effective rents. The highest quarterly net absorption in Singapore in over four years saw market conditions tilt even more in favour of landlords, and CBD rent growth accelerated for the fourth consecutive quarter. Brisbane leasing demand strengthened as expected and the strongest net absorption in the city since the start of the pandemic helped push up rents in 2Q22. Heightened uncertainty following a COVID-19 outbreak in Guangzhou contributed to a rent decline. Elevated vacancy rates and weak occupier demand pulled down Jakarta rents. Soft leasing demand, rising vacancy rates and supply pressure saw Tokyo rents trend down in 2Q22.

Capital values resilient despite headwinds

Investors were more cautious in 2Q22 due to geopolitical tensions, concerns over the broader global economy, as well as rising central bank policy rates. Widening gaps in buyer-seller price expectations contributed to a decline in quarterly sales transaction volumes in 2Q22, in both quarterly and annual terms. Robust deal volume and an acceleration in rent growth saw Seoul CBD capital values rise despite yield expansion. Investor appetite for Tokyo office product was strong, pushing up capital values despite rent declines. Singapore capital values rose as investor demand for Singapore office assets was resilient, as longer-term rent growth prospects offset concerns around rising interest rates. Sustained declines in Guangzhou rents and COVID-19 risks weighed on investor demand contributing to a decline in capital values. Institutional investors were cautious in Shanghai as COVID-19 outbreaks, economic uncertainty, and a large supply pipeline all contributed to a decline in capital values.

Rents flat through year end, capital values set to decline marginally

Leasing activity was up over 20% in the first half of 2022, but activity was mixed, particularly in India and China, the two largest leasing markets in the region. We maintain the view that in aggregate, gross leasing volumes will be up y-o-y with India outperforming. Performance elsewhere will be patchier although there are pockets of strength. We further maintain our view that aggregate rents will remain broadly stable through year end with growth accelerating to about 1% y-o-y in 2023. COVID-19 containment measures in China and economic headwinds present the biggest downside risks to our forecast. The policy rate environment continues to evolve rapidly, and strong US jobs reports continue to give the Fed more room to raise policy rates to tackle inflation. Several Asian countries are following similar monetary policy paths and consequentially we may see further yield expansion. As a result, capital values are likely to decline marginally in the second half of 2022 before rising in line with rents in 2023.






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