Rents in key cities pick up

According to CBRE’s Asia Office Market View Report for the third quarter of this year, there was renewed activity in major Indian office markets with CBD rents in key cities starting to pick up, although this did not have any positive impact on rental rates in decentralised office areas.

In New Delhi, rents for Grade A offices in the CBD strengthened, edging up 4.5 per cent quarter-on-quarter thanks to improved market sentiment and the lack of new supply.

Nariman Point CBD in Mumbai witnessed a few completed transactions, with many companies preferring to move to locations in the extended and alternate business districts in order to reduce their real estate costs. The Bangalore office market witnessed a rise in enquiries as a number of corporates considered relocating to the CBD, which boasts good civic infrastructure. However, this interest only translated into a limited number of medium and small sized transactions.  

Improved market

Anshuman Magazine, Chairman & MD, CB Richard Ellis, India said, “The increase in demand is largely due to improving economic conditions, positive market sentiments and growing corporate confidence. However, it would take some time for the supply-demand gap to get bridged, thus both rental and capital values are expected to remain stagnant or under downward pressure in the medium term.”

The Asian office market down cycle has stabilised in the third quarter of the year, as the improvement in Asian employment markets provided a clear indication that the office market was close to the bottom. Corporations outside of the export trade sector commenced expanding headcount and financial institutions began hiring staff to pursue high-margin businesses as economic conditions improved. Amongst Asia’s developed economies, Japan, South Korea and Hong Kong all reported their first declines in unemployment rate since the Lehman Brothers bankruptcy in September 2008.

Historically, office vacancy has trailed closely behind the unemployment rate. The third quarter saw overall vacancy for Asian cities remain at 12.5 per cent, unchanged from the previous quarter, but with Tokyo, Hong Kong, Beijing, Seoul and several Southeast Asian cities all recording a minor decline in the quantum of space vacant.

Office leasing increases

Office leasing activity gradually increased during the quarter after a quiet first half. Activity was characterised by companies seeking to reduce pressure on profit margins by relocating to more cost-effective premises.  Other corporate occupiers made a flight to quality by moving to prime buildings, more affordable now following the sharp rental correction witnessed over the previous year. The overall net absorption around the region increased 14 per cent q-o-q with only three out of the 17 cities tracked still recording negative absorption, namely Singapore, Delhi and Manila.  

Despite the improvement in business sentiment, occupiers remained cautious about real estate related expenses. Landlords continued to display flexibility in negotiations, especially in cities with high vacancy rates and which remain under pressure from a pipeline of new supply.

Asia office rents fall

The CBRE Asia Office Rental Index showed that office rents in Asia fell 3.1 per cent in the third quarter, decelerating from the 6.7 per cent decline in the previous quarter. Rents in Asian cities either underwent a milder rate of rental reduction or provided indications of slight improvement. It is expected that the rate of rental decline will ease further or bottom out in the coming months. Notwithstanding this fact, the threat of supply-side risk remained significant in Singapore as well as in the major office markets of China and India, all of which are presently expecting a large quantum of new office space to come on stream over the next few quarters.

Overall, the third quarter provided evidence of recovery in the Asian office market with a rise in leasing enquiries for Grade A office space and a halt in the previously rising trend in unemployment.

While it is highly likely that the Asian office market will exit the down cycle within 2010, past experience suggests companies will persist in implementing low-cost real estate solutions in the early phase of economic recovery. Rental levels are therefore likely to remain low for some time before finally returning to an upward track.