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Asia Pacific Office Still an Investment Magnet with Greater Emphasis on ESG

blog CMIS with greater esg considerations apac office still an investment magnet 1536x1040 v5

Office environments promoting sustainability and employee well-being a growing priority for occupiers and owners.


It has been nearly two years from the onset of COVID-19 and the real estate sector, as well as investors, occupiers, landlords and end-users, are coming to terms with the permanent changes in our way of life and work arrangements. People are beginning to realise that the only way to live with COVID-19 is to embrace and adapt to the new normal.

This has significant implications for the office asset class, on which I offered my insights at the recent Mingtiandi Office Strategies Forum 2021 online panel discussion.

The workplace has been undergoing huge transformations of its own, triggered by rapid technological advances and the ongoing decentralisation of business districts. These have undoubtedly helped companies boost employee productivity by shortening commute times and offering flexible work options.

Related content: Real Estate Investment Strategies: A Tech-led Era in Asia

 

Asia office transaction volumes: CBD vs non-CBD

With these changes to the workplace and the now ubiquitous hybrid work model, what lies ahead for the future of the office as an asset class?

Demand for office assets still going strong in an evolving workplace

The Asia Pacific (APAC) office segment has demonstrated immense resilience, despite the effects of COVID-19, testifying to the solidity of the region’s economy and the continued importance of office spaces in the evolving workplace. From Singapore to Sydney, core markets across APAC have been attracting strong cross-border capital flows.

In fact, office transactions across the region registered a healthy 18% year-on-year growth in the first three quarters of this year.

 

“The booming technology sector in APAC has been driving up demand for office space and is projected to account for about 25% of leased offices in the region over the next five years.”

 

While Tokyo, Seoul and Beijing were among the most active markets, appealing to both foreign and domestic investors, Sydney and Melbourne were mainly attracting foreign capital. In Singapore’s office market, activity from the local investors has been relatively muted as they have accumulated a huge inventory, while foreign investors are taking a long-term view and driving the bulk of the transactions.

In addition, the booming technology sector in APAC has been driving up demand for office space and is projected to account for about 25% of leased offices in the region over the next five years.

 

Property acquisition by technology firms in APAC (USD billions)

 

Related content: Growth Engines of Innovation

The growing demand for office space is particularly evident in certain markets. In Singapore, for instance, ample liquidity has lowered the cost of capital and pushed cap rates below the pre-COVID-19 levels.

In Seoul, the office market posted a stellar performance for several quarters running - thanks largely to the technology companies turning to the much sought-after Pangyo Techno Valley. This growth streak is set to continue, with the city expected to witness the finalisation of several major deals in Q4 2021.

In Japan, the office sector continued to attract investor attention across the major cities, such as Tokyo and Osaka, with a particularly strong appetite for prime properties in central Tokyo. In China’s financial capital of Shanghai, a host of deals driven by end-user demand for offices and business parks were inked in Q3 2021.

These are a testament to the still-robust demand for office assets. The office segment in China, in particular, has proven to be a remarkably resilient and stable asset class, despite the uncertainties in the past few months, and remains a solid investment choice.

Related content: Asia Pacific Market Snapshot | Q3 2021

 

The workplace of the future will be driven by ESG

Although more companies are adopting the hybrid work model, which involves providing employees with the freedom to work remotely for part of the week while coming into the office on other days, this has not reduced the demand for office assets. We are seeing more technology and e-commerce companies driving greater demand for such assets.

 

“Despite the higher operating and maintenance costs involved... Incorporating these sustainability features can help enhance occupancy rates and the overall value of their property.”

 

From a 2020 Colliers study on flexible workspace and the future of investing in the Asia office sector, it was clear that office will remain an essential element of successful work arrangements. At the same time, the nature of office requirements will have to change.

As people begin to trickle back into the workplace, they are also influencing a shift in building management strategies towards closer alignment with the environmental, social and governance (ESG) principles, which have come to the fore in the wake of COVID-19. An office environment that contributes to sustainability and employee safety and well-being have increasingly become front of mind with workers and employers alike, and has important implications for investors.

On environmental considerations, there is a clear push for buildings to incorporate green features that maximise occupants' health and productivity, while minimising waste and reducing the carbon footprint.

Increasingly, large multinationals are beginning to look into buildings that meet specific sustainability requirements, which have been incorporated into their corporate policies.

blog CMIS esg considerations apac office investment_green building

Despite the higher operating and maintenance costs involved, landlords should be aware that incorporating these sustainability features can help enhance occupancy rates and the overall value of their property.

In addition, we also foresee a raft of new government regulations to be announced in Australia, Hong Kong, Singapore, Shanghai and Beijing, which will implement stricter norms for new office buildings to safeguard occupiers. Investors will therefore place greater emphasis on properties with sustainability characteristics across APAC.

Office assets still play a pivotal role in real estate markets

I urge investors to observe and proactively adapt to the changing needs of occupiers, and how companies are heeding the calls of employees and other stakeholders for sustainability and flexibility.

These trends make it abundantly clear that while the workplace may evolve, office space will remain integral to business success and continued to offer value for investors over the near and long term.

 

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Mingtiandi Office Strategies Forum 2021 with Colliers' expert Terence Tang