Last week I was a panelist at a Nomura conference where we discussed the concept of fungibility of office demand. An interesting word “fungibility” – meaning in this context the extent to which office space in one location can be interchanged or substituted with space in another location. This topic is being discussed increasingly as rents rebound across Asia Pacific following the Global Financial Crisis. In some markets, namely Greater China, rents are almost back to previous peak levels. As accommodation costs rise, are corporates deciding to pack up and move to cheaper locations?

The answer is more complex than that. Accommodation costs typically account for only around 10% of total operating costs, far less than staffing costs which are around 60%. And crucially, businesses need to have a presence near their customer base. In the case of Hong Kong, the region’s most expensive office market, demand for space has been buoyed in the last couple of years by strong growth of the financial services sector including Mainland Chinese banks as well as MNCs wanting proximity to China. Over the same period, average grade A rents in Hong Kong’s CBD have increased by 50%, raising questions about affordability.

More generally corporates across Asia Pacific have returned to growth mode but at the same time are operating in a continued environment of cost constraint. So how are they tackling the challenge of increasing rental costs? Through a variety of strategies including:

• Decentralisation. In Hong Kong, most submarkets are at least 50% cheaper than the CBD.
• Moving operations that are not location dependent. We are seeing a trend of back office functions being moved to low cost centres which have the required skill base including India, the Philippines and second tier cities in China such as Dalian.
• Alternative workplace strategies. Open plan seating, hot desking and the increasing use of mobile technologies are enabling corporates to reduce their office space requirements.

Expect to hear further discussions on the topic of fungibility as office rentals continue to rise across the region.

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