Growth seen in Asia office rentals in '08

April 8, 2008
PROPERTY OUTLOOK
Growth seen in Asia office rentals in '08
But analysts say some cities, including S'pore, may see slowing
rental growth, reports UMA SHANKARI

BUOYED by limited office supply in some cities and high GDP growth,
all major office markets in Asia are expected to see rental growths
in 2008, but the pace of growth will vary from city to city, property
analysts say.

'Across the board, we still see positive demand for office markets
across Asia,' said Megan Walters, director of research and business
analytics for Asia Pacific at Cushman & Wakefield (C&W). 'But
obviously the problems in the financial markets in the US have not
been played out yet, and we have yet to see how it will affect
investment markets in the region.'

The firm expects all offices markets in key cities across Asia to
record increasing rents in 2008. However, about half the cities
profiled - Singapore, Beijing, Shanghai, Chengdu, New Delhi, Mumbai,
Kuala Lumpur and Bangkok - are expected to see slowing rental growth.
The other cities - Hong Kong, Tokyo, Seoul, Taipei, Bangalore and Ho
Chi Minh City - are still seeing accelerating rental growths.

Industry players here will perhaps be most interested in what is
happening in Singapore and Hong Kong - long been seen as rivals in
the region as a centre for international office services. The slowing
rental growth in Singapore will be welcomed by many on the back of
fears that the Singapore office market was overheating.

Rents here have been pushed up over the last few years mainly by
expansion in the financial services sector owing to factors such as
domestic growth, economic restructuring that resulted in the
expansion of the service industries as well as the influx of both
regional and global jobs into the market.

Rentals are not just climbing - they are climbing at a pace faster
than ever seen before. Industry veterans have expressed fears that
this could make Singapore less competitive compared with Hong Kong,
where rents are rising at a more sedate pace.

For example, data from C&W shows that rents at Raffles Place in
Singapore's Central Business District (CBD) have risen 100 per cent
in the last year unlike Hong Kong's more moderate 15 per cent. And
according to some reports, it is now more expensive to take up office
space in Singapore than in Hong Kong.

Data released by Jones Lang LaSalle (JLL) yesterday shows that CBD
core Grade A gross effective office rent in Singapore for the small
space category (less than 10,000 square feet) stands at $17.35 per
square foot per month (psf pm), up 8.4 per cent quarter on quarter
from the $16.00 psf pm seen in Q4 2007. This is marginally higher
than the quarterly rental growth of 7.4 per cent registered in Q4
2007, JLL said.

'In comparison with Hong Kong, the current gross effective rent of
Grade A offices in Hong Kong Central - equivalent to Raffles Place in
Singapore - stands at US$15.10 psf pm,' said JLL's report. 'This is
some 21 per cent higher than Singapore's CBD core prime Grade A gross
effective rental value of US$12.50 psf pm (or $17.35 psf pm).'

However, things should even out with more supply coming onstream in
Singapore. Market watchers say that the rate of rental growth will
slow and occupancy rates will fall this year. 'The growth in rental
values is expected to moderate this year after a record increase in
2007,' said Cheng Siow Ying, DTZ Debenham Tie Leung's executive
director.

Chris Archibold, head of commercial leasing at JLL, similarly noted
that the rapid rental increase seen in Q1 2008 is mainly due to
spillover demand.

He said: 'While Singapore office rental growth in Q1 2008 is some
cause for optimism in this uncertain market condition, the increase
in rental value is largely a spillover from the previous quarters.'

And a new report by DTZ says that islandwide office occupancy dipped
in the first quarter of 2008, easing half a percentage point quarter
on quarter to 97.1 per cent. The dip followed a 0.1 point drop in Q4
2007 from Q3.

The average occupancy of office buildings at Raffles Place dropped
half a percentage point to 97.8 per cent in Q1, while that at Marina
Centre rose 0.7 percentage point to 99.8 per cent.

DTZ attributed the slight dips in occupancy partly to two office
buildings coming onstream. Together, The Central and VisionCrest
Commercial added some 538,100 sq ft of new office space - raising
islandwide office stock one per cent quarter on quarter to 56.6
million sq ft. Both buildings are not even fully leased yet.

Some occupiers are beginning to exercise caution in their medium-term
leasing requirements, DTZ's Ms Cheng said. Going forward, the demand
for CBD core office space in Singapore is expected to continue to be
strong on the back of more demand from banks and financial
institutions, many of which have set their sights on the burgeoning
private wealth management in Asia.

But there will be some moderation for both rents and capital
values. 'Although the financial and business sector is still expected
to remain robust, the more modest economic growth projected will see
companies limiting their expansion of office space requirements,'
Knight Frank noted in a recent note. 'Some landlords would also be
more accommodating of tenants in order to attract or retain these
users of office space.'

And for the rest of Asia, a lot depends on how the sub-prime crisis
in the US plays out, property analysts said. The region's investment
markets - including for the office sector - are expected to emerge
from the credit crunch better than their US or European counterparts.

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