- While demand seems to be picking up in China, Colliers expects a 41% drop in aggregate APAC absorption of office space
- Reflecting heavy planned supply in H2 in the leading Chinese and Indian cities, aggregate APAC new supply should be 2.8x absorption in 2020; supply should remain heavy in 2021 but ease thereafter
- Markets where rents fell over 5.0% included Hong Kong SAR, Manila and Sydney CBD, where face rents held steady, but incentives rose. Singapore, Taipei, Bangalore, Melbourne CBD and Auckland should achieve five-year average growth of between 3.3% and 2.2%
- The prospect of conditions favouring tenants for up to three years give occupiers the chance to lock in good deals in markets like Hong Kong Central, Shanghai’s New Bund and Shenzhen’s Qianhai district
- In the long run, the office markets with the greatest potential for capital appreciation should be popular occupier centres with solid rent growth, e.g. Singapore, Bangalore, Melbourne CBD and Auckland
Hong Kong, 18 August 2020 – Colliers International (NASDAQ: CIGI; TSX: CIGI), a global leader in commercial real estate services and investment management firm, today released its Asia Pacific Office Markets: H1 2020 Review and Five-Year Outlook Report. This report provides an overview of demand, supply, rent and vacancy rates in the APAC office market space for the first half of 2020 as well as the outlook for 2020-2024.
Andrew Haskins, Executive Director, Research, Asia, at Colliers commented: “In aggregate, APAC office markets are under pressure from a combination of muted demand and high planned supply. The prospect of conditions favouring tenants for up to three years gives occupiers the chance to lock in good deals in markets like Hong Kong’s Central, Shanghai’s New Bund and Shenzhen’s Qianhai district. Investors should focus on popular occupier centres with above-average rent growth over five years, such as Singapore, Bangalore, Melbourne CBD and Auckland.”
Demand under pressure, but expected to pick up gradually
Aggregate absorption in the 19 APAC office markets that Colliers tracks closely fell 56% QOQ in Q2. While demand appears to be picking up in China, over 2020 we predict a drop of 41%, to 4.03 million square metres. Average annual absorption over five years should be close to the 2019 level of 6.82 million square metres. Office markets that held up well in H1 2020 include the seven major Indian cities (most notably Bangalore (Bengaluru), Seoul and Singapore, while Hong Kong SAR, Tokyo and Sydney showed negative net absorption.
Colliers foresees heavy supply over 2020 and 2021
Aggregate new supply in Q2 2020 equalled about 3x aggregate take-up. Indian cities were the chief drivers of new supply, with Melbourne CBD also strong. Reflecting heavy planned supply in H2 in the leading Chinese and Indian cities – led by Shanghai, Bangalore and Delhi-NCR – plus high supply in Tokyo, Seoul and Melbourne CBD, Colliers expects aggregate APAC supply of office space to be 2.8x absorption in 2020. Medium-term supply should be high in China (notably Shenzhen), Bangalore, Delhi-NCR and Australia (notably Sydney CBD). Across APAC, Colliers expects aggregate new supply to exceed aggregate absorption over the three years from 2020 to 2022. Supply should move back into balance with demand thereafter.
Rents declining now, though medium-term outlook brighter
Higher incentives softened net effective rents across APAC over H1 2020; this should continue over H2. For 2020, weighted average APAC net effective rent should fall 5.0%. The rising importance of office stock in China (where rental recovery may lag the rest of APAC by a year due to high supply) and India drives Colliers’ forecast of a 0.7% average annual rent decline over five years. However, the medium-term rental outlook in popular occupier centres is brighter. Singapore should achieve five-year average annual growth in rent of 3.3%, while Bangalore, Melbourne CBD, Taipei and Auckland should achieve five-year average annual growth of 2.2%-3.0%. Landlords in many markets will be competing for a limited demand pool and landlords will likely attempt to differentiate their product offering by increasing attention to health and safety, advanced mechanical systems, and wellness and environmental credentials.
Vacancy set to rise for two years
The aggregate APAC vacancy rate stood at 11.4% at end-Q2. Reflecting heavy supply in China and India, Colliers expects APAC vacancy to peak at 14.5% at end-2022. This should ease to 13.3% by end-2024. For occupiers, this means a sustained period of nearly three years over which many APAC markets will favour tenants. This situation presents an opportunity for occupiers to lock in deals in attractive markets such as Central in Hong Kong or New Bund in Shanghai or Qianhai in Shenzhen now. It also provides a means for occupiers to determine and execute their long-term accommodation strategy and business vision in each of the cities within the region.
Capital values not collapsing, positive signs for medium term
Investment sales of APAC offices fell 48% YOY in Q2 but rose 17% QOQ due to a pick-up in Shanghai, Beijing and Singapore. Despite the pressure on overall investment levels, in general capital values have yet to fall sharply, and yields are little changed. Colliers expects modest yield softening over H2 and H1 2021. In the long run, the APAC office markets with the greatest potential for capital appreciation should be those offering the highest rent growth, such as Singapore, Bangalore, Melbourne CBD and Auckland. Furthermore, investors will likely assign a premium to buildings with very high standards of hygiene and sanitation, and wellness certifications. This implies that demand will remain firmest for prime grade office space.
Click here to download Asia Pacific Office Markets: H1 2020 Review and Five-Year Outlook Report.