Office Market InsightsMay 30, 2022 / By
Office leasing demand returns to pre-pandemic level
After surging to record levels in 4Q21, Asia Pacific leasing activity fell back to normal levels in 1Q22, gross leasing volumes were up 1.5% over the pre-pandemic five-year first quarter average. Volumes were up 26% y-o-y in aggregate due to base effects with business sentiment and leasing demand far more buoyant across the region compared to a year ago.
While sentiment in Mainland China remained upbeat in 1Q22, volumes were mixed and declined 9% y-o-y in aggregate. Broad based demand supported leasing activity in Shanghai Puxi CBD while financials and professional services companies were active in Pudong CBD. Leasing demand in Beijing remained resilient and a diverse range of tenants bolstered leasing volumes, but financials were especially active. COVID-19 flare ups and soft TMT demand pulled down Guangzhou volumes in 1Q22.
While India leasing activity slowed in q-o-q terms, volumes were up 29% y-o-y with substantial uplift in leasing activity recorded in Delhi and Chennai compared to a year ago. Overall, the IT sector continued to be the key driver of leasing activity followed by manufacturing and industrials. Leasing volumes fell in most Australian markets; however, volumes were up in aggregate on the back of robust activity in Melbourne and Brisbane. Several large public administration relocations drove leasing in Melbourne, while both large and small occupiers supported Brisbane volumes.
Despite resilient q-o-q and y-o-y growth estimates in Tokyo, gross leasing remained below pre-pandemic levels in 1Q22 due to soft demand. Although space in Gangnam remained limited, Seoul leasing volumes continued to improve with activity coming from other districts, especially Yeouido.
Rents continue to broadly stabilise
Improving business sentiment and strengthening demand saw Asia Pacific rents continue to flatten out in 1Q22 despite elevated vacancy rates and record supply in the pipeline for 2022 and 2023. As expected, growth turned positive for the first time since the start of the pandemic with rents up 0.2% q-o-q (-1.7% y-o-y) in aggregate.
Tight vacancy rates and strong leasing demand saw Singapore rent growth accelerate for the fourth consecutive quarter and record the strongest rent growth of the major markets in 1Q22. Increasingly landlord favourable conditions saw Seoul CBD rent growth accelerate sharply. Shanghai rounded off the top three fastest growing markets as rent growth accelerated sharply despite a disruption of leasing activity in late March.
Elevated vacancy rates continued to exert downward pressure on Jakarta SCBD rents which have now declined for 27 consecutive quarters. Weak leasing demand and a large supply pipeline contributed to rent declines in Tokyo, rents have declined continuously since the start of the pandemic.
Steady growth in capital values
Competition for available assets remained healthy in 1Q22 and in conjunction with stabilising rents, provided robust support to capital value growth despite concerns around inflation. Investor appetite for high-quality office assets was strong and in aggregate capital values grew 0.7% q-o-q for the second consecutive quarter.
Sydney recorded the strongest capital value growth of the major markets as sales volumes picked up; transactional evidence pointed to compression in prime yields. Renewed interest in office assets, supported by strengthening leasing demand, bolstered capital value growth in Beijing. Healthy investment activity and rental growth underpinned increases in Seoul capital values despite increases in the central bank policy rate. Rising vacancy rates saw JREITs sell several Tokyo assets in 1Q22 which supported transaction volumes; however, declining rents pulled down capital values. Similarly rental declines led to a slide in capital values in Osaka.
Asia Pacific office markets on the road to recovery
Leasing demand was strong, in line with our expectations and we forecast aggregate leasing volumes to continue to strengthen over the remainder of 2022. However, growth will be uneven with strength in some markets offsetting weakness in others. In aggregate we forecast leasing volumes to grow in the range of 10-15% for the whole of 2022. As demand is strengthening and leasing market conditions improving, we expect to see rents remain broadly stable through the end of 2022. However, we do see downside risks to our forecasts, the most notable of which is the recent COVID-19 outbreak in Mainland China.
The policy rate environment is expected to continue evolving over the course of 2022 as the Fed seeks to mitigate inflationary pressures in the US. There will be knock on effects in Asia Pacific but we hold the view that not all central banks will raise rates in lock step with the Fed. As such we see room for further capital value growth in 2022 with an increase of roughly 1.5% for the full year.
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