Based on a new report by CBRE, overall vacancy in Asia in Q1, 2015 increased for the first time in two years rising to 9%, due to slower leasing activity and the large volume of new office supply scheduled for completion in 2015.
CBRE expects that oversupply will persist over the remainder of the year and vacancy will continue to rise. In Manila's CBD, vacancy was up by 5.1% quarter-on-quarter whilst in Bangkok, vacancy increased to 8.1%, however, demand in both of these markets remains healthy and vacancy is expected to fall. Vacancy also continued to increase steadily in several key Pacific markets as demand remained weak in the absence of any catalysts.
In spite of weaker leasing demand, the CBRE APAC Office Rental Index increased by 0.6% quarter-on-quarter, a similar rate growth as in Q4 2014. Tight availability and healthy occupier demand in key gateway cities such as Hong Kong and Tokyo resulted in solid rental growth of around 2.0% quarter-on-quarter, which helped offset weaker rents in Seoul and Perth.
Key APAC office market highlights in Q1, 2015 include:
New Grade A completions in Asia this quarter totaled 13.7 million sq. ft., the highest quarterly figure in ten years. Around 50% of this new space is in Shenzhen and New Delhi. Other cities in China and India will see a wave of new supply this year with most new stock located in non-core areas. Taking into account project postponements and slippage ratios, estimated new Grade A supply in Asia Pacific this year will be around 50 million sq. ft. NFA.
The CBRE APAC Office Rental Index is expected to record growth of 3.5% this year, an improvement on the 3.2% forecasted in January 2015. This is due to the better rental outlook for Hong Kong and Shanghai, which is offsetting the downward revision for Singapore and Seoul. In Singapore, rents are peaking; there are concerns over the strength of demand in this market, and combined with a wave of new supply in H2 2016, rents are expected to stay flat over the rest of the year.
In Q1 2015, office leasing demand in Asia Pacific weakened. Seasonal factors including the holiday period and a focus on longer-term strategic planning pushed down regional office net absorption by 35% quarter-on-quarter to 7.1 million sq. However, after discounting the unusually large negative net absorption in Seoul, net absorption during Q1 was almost unchanged on a year-on-year basis.
Manish Kashyap, Regional Managing Director, Head of Brokerage Services, CBRE Asia Pacific says, "Despite slower leasing activity in Q1, improving business sentiment and the positive job market is expected to support steady office leasing demand in this region over the course of the year. Indian companies retain a positive business outlook for the fourth consecutive quarter due to the confidence in the new government's economic reform agenda and the continued strength of the outsourcing business. Several markets in Asia Pacific recorded a significant increase in enquiries in March, which suggests net absorption will increase in Q2 2015, however, Seoul will continue to struggle which could negatively impact overall regional demand.
Demand in the region will continue to be led by domestic companies whilst multinationals remain cost sensitive. The TMT sector continues to drive leasing activity with tech firms continuing to display a stronger appetite for high quality space. The financial services sector is also expected to display steady demand but only in few sub-sectors in selected markets, such as small loan companies in China and Mainland Chinese securities and wealth management firms in Hong Kong."
Jonathan Hsu, Head of Occupier Markets Research, CBRE Asia Pacific also commented, "This quarter, as a result of robust demand from financial services firms and tech firms, Shenzhen recorded strong office demand with net absorption totaling 1.4 million sq. ft. (NFA), the highest figure recorded since Q2 2010. Leasing momentum in Tokyo also rebounded strongly, with net take-up surging by 50% quarter-on-quarter. On the other hand, we saw that Seoul's office market struggled this quarter as domestic conglomerates scaled back operations due to weak economic growth. Weak demand was also recorded in Singapore with very few new expansionary requirements reported.
With CBD submarkets in gateway cities continuing to see comparatively stronger rental growth, landlords in weaker markets were observed to be offering longer rent free periods. This trend was especially prominent in Seoul, where landlords of new projects found it challenging to secure tenants. A few major markets in Australia saw a marginal drop in incentives this quarter but levels have yet to peak in several cities. With vacancy forecasted to increase further over the course of the year with around 36 million sq. ft. NFA of new Grade A office supply scheduled to be completed in Asia over the next three quarters, this will exert considerable pressure on landlords of existing and new buildings in a number of markets. However, fears of oversupply are being relieved by strong pre-leasing activity in certain markets in China and India such as Shenzhen, Guangzhou, Bangalore and the New Delhi NCR."