Adrian edited this around 5pm on 12/4/02

Adrian edited this around 5pm on 12/4/02

;JP;ICN; ANPAc..r.. Office-property-outlook

Market demand remains modest, trend is likely to continue

I. Christianto Contributor Jakarta

Office property in the capital reported modest growth during the first quarter of this year in line with the country's slow economic recovery.

The market trend is likely to continue as there is no indication that business will improve within the next few months.

In its latest Property Market Review, property consultant PT Procon Indah reported zero new supply to the Jakarta office market in the first quarter of this year.

In the first quarter of this year, total office stock remained at 4.89 million square meters (sqm) comprising of 2.93 million sqm in the Central Business District (CBD) area and 1.96 sqm outside the CBD area, said Lini Djafar, who is the director of the property consulting company's strategic advisory division.

She said the 30,000-square-meter Asiatic Tower in Kuningan, which had managed to secure a 35 percent pre-commitment, was expected to be completed and ready for occupation only in the second quarter of this year.

In addition to the Asiatic Tower, she added, future supply in the CBD will include the 37,000-square-meter Wisma Mulia 1 and the 73,000-square-meter Wisma Mulia 2. Both office buildings are located on Jl. Gatot Subroto.

She said that at the end of March, there was 83,000 sqm under construction outside the CBD. Out of the confirmed future supply, about 54,000 sqm is scheduled for completion this year and the remaining in 2003, she added. Therefore, the total future supply during 2002 and 2003 will reach 223,000 sqm.

The economic reasoning may have been the reason why many developers have temporarily suspended the construction of high- rise office buildings.

Djafar said the office market was off to a slow start during the first quarter this year with an overall occupancy rate of 79.6 percent, a slow increase of 0.7 percent compared to the last quarter in 2001.

Slow economic growth still plagues the capital's office property market, restricting new demand, she said, adding most business sectors maintained, or even reduced, their space requirements for cost efficiency reasons.

The overall take-up in the CBD was 17,300 sqm, a 4-percent decrease compared to the previous quarter. As a result of this positive net take-up, occupancy in the CBD had risen by only 0.6 percent to 77.9 percent, compared to the fourth quarter in 2001. Occupancy rate beyond the CBD was 15,400 sqm, increasing the occupancy level to 82 percent. Increasing occupancy rates occurred mainly in competitive rupiah rental office buildings.

In the first quarter of 2002, the total amount of vacant space reached 1 million sqm, with 647,000 sqm located in the CBD.

Rental rate: The current competitive rental market continued to be the most important factor influencing tenant preference in choosing office space, according to Procon.

The average gross rental in the city's CBD office market showed a slight improvement from Rp 99,900 per sqm per month in the last quarter to Rp 100,500, the company said. In equivalent U.S. dollar terms, it reflected a significant increase by 8.4 percent to US$10.4 per sqm per month due to the strengthening rupiah against the dollar during the first quarter of 2002.

The rupiah has recently been on an upward trend following some improvement in the country's political situation.

However, Procon added the improvement in the average gross rental rate was not due to a base rental increment but to the continuing increase in service charges over the quarter.

The rise in electricity rates has led to a significant increase in service charges over the past three months. However, there has also been an increment in the base rent rate in certain office buildings that have enjoyed an above-average occupancy level.

Procon said the average rupiah gross rental rate outside the CBD was 34 percent below the average rental rate in the CBD. The average gross rental rate outside the CBD rose by 1.8 percent to Rp 67,400 per sqm per month during the review period.

Tenants: Relocation and expansion of domestic companies are the major force in the capital's office-market-leasing activities. These main tenants are companies dealing with insurance (18 percent), telecommunications (16 percent), trading (13 percent) and finance (10 percent).

Procon said 35 percent of demand originates from relocation for cost-efficiency reasons or upgrading premises to better quality office buildings, 26 percent were from tenant expansion and the remaining were new firms and additional office space.

Better quality included not only location but also smart buildings. A major force driving the marketplace is the information technology and telecommunications revolution. With the world's growing reliance on Internet, e-mail and other computer-related enterprises, the phenomenal information explosion is impacting upon every business.

Advanced telecommunications and data services are vital to all businesses. Therefore, many tenants presently want to have uninterrupted state-of-the-art resources available.

Nowadays, some tenants are willing to move to other office building to improve their image, as well as for additional safety and security services extended by the building's owner or management. Investment: Procon cited the investment activity in Jakarta's office market saw stable interest from domestic companies.

Investors in consumer goods industries were actively seeking office buildings for sale in the first quarter of 2002, while others were looking for building acquisition through a share participation in existing owner companies.

However, the availability of stock that could meet investors' requirements remained very limited, although there were several CBD office buildings offered for sale this quarter. The estimated capital rupiah value of CBD office buildings increased slightly by 2.9 percent to Rp 8.4 million per sqm.

Outlook: The prognosis for the office market in the capital will remain slow for the whole year, according to Procon. A combination of low economic growth and external factors such as mergers in the banking sector will adversely affect Jakarta's office sector.

Market activities will continually come from domestic demand doing relocation for cost efficiency reasons or seeking better quality office space offered at competitive rental rates. Consequently, leasing deals in lower-grade rupiah office building are likely to be more active compared to U.S. dollar buildings.

The overall occupancy level of Jakarta's office market is expected to increase slightly this year due to softening demand and the increase in new supply. The increase in rental income tax applied by next month is likely to affect base rental rates for new deals in the next medium term. Combined with regular increments in the electricity rate, average gross rental rates in rupiah terms are expected to increase as several landlords continue adjusting their service charge.

The investment market is predicted to be more active with local and foreign companies keen to look for good quality office buildings, particularly given that the Indonesian Bank Restructuring Agency is likely to dispose of more assets, as they have to fulfill their obligations by next year.