Asia is home to eight out the world’s 10 largest metropolitan cities, and the decentralisation of office markets has been a fast-growing trend in the recent years.
Decentralised office markets are key to improving work efficiency, shortening commute times, and offering employees the possibility of flexible work arrangements.
The shift towards decentralised office markets also offers more greenfield development opportunities on larger land sites, which support development flexibility, larger floor plates and the incorporation of modern facilities.
The office decentralisation trend in Hong Kong continues to grow amid growing demand for office space in areas outside of the CBD
Across major Asian markets such as China, Japan, Singapore, Hong Kong and India, investors have been following the trends around decentralisation of office markets. In 2020:
- Transaction volumes of decentralised office assets set a new record of US$36.6 billion
- Decentralised office investment grew 6% relative to 2019 and were up 34% relative to 2018 volumes
- In contrast, transaction volumes in centralised office markets, i.e., the centralised business districts (CBD), fell 7% in 2020 from 2019, and saw a decline of 21% relative to 2018 volumes
This trend towards decentralised office investment has only accelerated further in 2021. For the first time on record, decentralised office transaction volumes have surpassed the volume of the centralised CBD market:
- Over the past 10 years, the decentralised office market has accounted for an average of 40% of the deal flow
- Year-to-date, decentralised office transactions now accounts for 52% of the overall office market
Total investment volumes in these decentralised office markets were even higher, when considering the larger volume of development activity occurring in these submarkets, relative to their respective CBD markets.
Asia office transaction volumes: CBD vs non-CBD
Offices expanding into non-CBD locations too
Fringe locations as well as some decentralised office precincts are also becoming more institutionalised. Assets in these areas have grown larger over time and tend to be newer than the stock within the centralised market.
As a result, these submarkets are now well within the purview of institutional investors.
Many cities around Asia now have city planning policies that also aims at creating new decentralised office hubs and are providing incentives for further development of these areas. These hubs are often located within areas that provides well-established transport infrastructure and in close proximity to the workforce.
To be completed by 2027, the Jurong East integrated transport hub in Singapore - which will house office and retail space connected to the transport hub - aims to optimise land use and decentralise and consolidate office spaces from the city centre
At times, these decentralised office submarkets are created with the aim of developing industry clusters. Typically, governments would provide development incentives or make their own investments in these clusters to support their development.
A growing investment opportunity
From an investor’s perspective, these emerging decentralised office markets present a growing opportunity. Higher yields on offer in decentralised office markets are an attractive proposition for investors in a low-interest-rate environment. As some major tenants continue to expand beyond the centralised office market, tenant covenants in the decentralised office locations are improving.
“Higher yields on offer in decentralised office markets are an attractive proposition for investors in a low-interest-rate environment.”
As a result of this trend, lease terms are increasing in decentralised office markets, and development projects are more likely to secure pre-leasing from larger anchor tenants. Overall, these aspects are helping to reduce some of the risk factors that were once considered commonplace in decentralised office investments.
3 key takeaways on office decentralisation:
- Decentralised markets are likely to account for a larger share of both transaction volumes and development commencements
- Developers will be looking to roll out build-to-core office project, while corporate tenants and co-working operators will be seeking out new Grade A office space to expand their operations
- More investors will start to follow these themes and look to either acquire completed development stock or identify stabilised investment opportunities
To see what could be for your next office investment in Asia, reach out to our Capital Markets & Investment Services experts.
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