Demand for prime office space in Asian business districts on the rise

Demand for office space in the key commercial centers of Asia continued to increase in the second quarter of 2005, with improving business prospects resulting in more companies expanding their headcounts and office space requirements.

Tenants in the services sector, such as banking/finance companies and professional services firms, were among the most active in the leasing market.

"The growth in office demand is showing no sign of letting up," Jane Murray, 's Research for Asia and Pacific.

"With sustained demand helping to push down vacancy rates over the past two years, there has been increasing pressure on office rents to move up in the major cities. Prime buildings have so far led the rebound but this growth in rents is beginning to show in the rest of the market, Murray said.

The demand for retail space in key Asian cities continued to expand as retailers, upbeat about their business prospects, took up more space. Sustained economic growth and improving labor market conditions supported steady domestic demand, while strengthening local economies and the availability of cheaper airfares fueled the growth in tourism.

The resilience and high yields of the retail sector also continued to attract investors. Both rents and capital values in most cities were either stable or increased during the quarter, as in the previous three months.

Residential sales activity in the major cities remained healthy on the back of continued consumer optimism and several of these cities reported rising capital values. However, regulatory changes in China and higher interest rates in Hong Kong dampened transaction volumes and prices in Shanghai, Beijing and Hong Kong, which had seen the strongest growth in both sales and prices in recent quarters compared with other cities.

In the leasing market, corporate expansions contributed to further growth in demand. Landlords in Beijing and Shanghai as well as Hong Kong are among the key beneficiaries, with average rents rising again in the second quarter.

Positive net absorption, falling vacancy rates, and stable or rising rents continued to characterize the office markets of key Asia Pacific cities on the back of the regions strengthening economies.

With sustained growth in demand pushing down vacancy rates over the past two years, upward pressure on office rents in the major cities has been increasing. Demand for prime office space has been largely coming from companies in the services sector, such as banks, insurance companies and other finance related businesses, as well as professional services firms.

Hong Kong has been the biggest beneficiary of the regional rebound in office demand. The city continued to record double- digit growth rates in rents as positive business sentiment kept the leasing market active with companies seeking to expand or upgrade. The take-up of prime office space continued to outpace new supply, resulting in a further decline in vacancy rates.

In the region's largest office market, Tokyo, the quick pace at which various upcoming projects are preleased demonstrate the solid demand for Grade A office space and reflect the growing optimism in the economy. The average vacancy rate of Grade A buildings in the CBD fell for the eighth consecutive quarter and rents climbed for the second quarter in a row. However, the rest of the CBD market remained subdued and landlords attempted to fill vacant space by lowering rents.

In the Singapore CBD Core, the rental upturn is slowly filtering through from the Grade A to the Grade B market, as the reduced availability of Grade A space has contributed to an increase in leasing transactions for better-located Grade B properties. Medium- to large-space occupiers historically start their lease renewal/relocation exercise about six to nine months before their lease expiries, but many are now looking to commit earlier, some up to 18 months ahead.

With China's economy still booming, Shanghai and Beijing continued to see robust levels of leasing activity for prime office space, supporting a further increase in rents.

Strong pre-leasing interest in projects still under construction highlighted the strength of demand. Despite the completion of CitiGroup Tower (94,300 sq m) in Central Lujiazui, the average vacancy rate of Pudong, Shanghai held steady at 7.4 percent, and in Beijing, even with the completion of four buildings (total: 353,800 sq m), the average vacancy rate fell further.

The rebound in the region's leasing markets have led to an increase in investment sales activities, though these are still concentrated in North Asia (Japan and Korea) due to the attractive yield-to-cost spread. However, given the falling yields of office properties in Tokyo, investors are looking for opportunities in other sectors and in some major regional cities. --- Jones Lang LaSalle/The Jakarta Post