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Office Market Insights

December 1, 2021 / By ,

Leasing activity mixed but demand is on the road to recovery

Leasing activity continued to improve in 3Q21, and quarterly volumes were up 25% y-o-y off a low base. Leasing activity has yet to fully recover but overall volumes are returning to pre-pandemic levels, 3Q21 Asia Pacific quarterly volumes were only 5% below the pre-pandemic five-year average. However, the improvement in leasing activity has been uneven and much of the y-o-y growth was driven by Mainland China markets.

Beijing registered remarkable growth due to stronger than expected relocation demand, large domestic TMT companies were especially active. Shanghai CBD leasing volumes were also robust with activity largely driven by domestic financials and professional services firms. Mainland China 3Q21 volumes were more than double the pre-pandemic average.

Australia volumes continued to improve in 3Q21 with volumes down only 10% compared to the pre-pandemic third quarter average. Improved economic and labour market conditions underpinned expansionary demand in both Sydney and Melbourne. However, some occupiers rationalised space in both markets.

Leasing demand in Southeast Asia was mixed as some markets outperformed while demand was weak in others. COVID-19 restrictions saw Singapore volumes contract marginally q-o-q yet activity in the city state was above the pre-pandemic average. Preleasing activity supported a marked improvement in Bangkok leasing activity; however, volumes in Jakarta and Manila remained weak.

Although India’s quarterly volumes improved marginally in 3Q21, they were subdued compared to pre-pandemic levels in large part due to staff at IT/ITeS companies continuing to work from home. However, these companies are likely to ask staff to return to the office in the coming quarters and leasing activity should pick up in response.

The pace of rental declines slows

Uneven leasing activity and elevated vacancy rates maintained downward pressure on rents across much of Asia Pacific. The number of markets recording rent growth exceeded those that recorded losses, but growth was weak and the magnitude of declines pulled the regional average down to -0.7% q-o-q.

Singapore again led the pack in 3Q21 with rent growth driven by sustained improvements to business sentiment and upgrade demand. Broad based demand and declining vacancy rates supported Shanghai CBD rent growth. Increases in Hong Kong Central rents were underpinned by demand for space in premium buildings.

A state of emergency again weighed on Tokyo leasing volumes and landlords in the 5 Kus again lowered rents amidst rising vacancy rates. Elevated vacancy rates saw landlords in the Melbourne and Sydney CBDs increase incentives again leading to a decline in rents.

Capital values bolstered by robust investor demand

Asia Pacific capital values fared better than rents again in 3Q21, holding flat q-o-q. The cost of capital remains low, liquidity abundant and the weight of capital exceeds product available in the market. Some investors are reportedly considering accepting lower initial yields with the expectation of future rent growth over the near term.

Year-to-date Sydney investment volumes have nearly equalled 2020 full year levels as investors remain active it the market, driving up capital values. Nine deals with ticket prices exceeding KRW 100 billion closed in Seoul, supporting growth in capital values there. Growth in Singapore CBD capital values was bolstered by both rising rents and healthy competition for assets available for sale.

Yields in both Tokyo and Osaka were flat in 3Q21 indicating capital values declined in line with rents. However, investors remain interested in both high-profile Japanese office markets.

Asia Pacific office markets poised to recover in 2022

The recent strengthening in leasing activity is in line with our view that demand will quickly recover as the pandemic is brought under control. As vaccination rates continue to rise and new treatments for COVID-19 become available, we forecast further improvements to leasing volumes in 2022. We expect rents to continue trending down in 4Q21 recording a full year decline of about 2.5%. Our forecast calls for rents to stabilise in the first half of 2022 and to begin rising marginally in the second half of the year.

Market conditions have been supportive of capital values through the first three quarters of 2021 and we expect full year growth of 1.2%. Moreover, we expect these conditions to persist into 2022 and investors with an optimistic outlook for a near- to medium-term recovery in the office sector will underpin further growth in capital values. With further support coming from rent increases, we forecast a moderate acceleration in capital value growth to about 1.5-2% y-o-y.

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