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Asian cities outpace the world in office market recovery

SINGAPORE, 6th May 2011 - Buoyant business sentiment and corporate hiring underpinned the Asia Pacific office leasing market in 1Q11, according to new research from Jones Lang LaSalle in their recent Asia Pacific Office Index. Aggregate net take-up across major Tier I markets was at a similar level to the previous quarter, but showed a marked year-on-year improvement of over 30%.

Jeremy Sheldon, Head of Markets in Asia Pacific for Jones Lang LaSalle says, “The global comparison shows how the traditional Asian centres have outpaced the world in their recovery. At the same time, we can see a strong re-emergence of ASEAN as a force in Asia, with Jakarta now topping the table in both rental and capital growth as it reaps the benefits of the recovery. These are exciting times for Asia Pacific Office markets.”

“The pace of recovery in Asia Pacific, and the influence of China, is demonstrated by the rental growth being experienced by Hong Kong as companies worldwide strive to locate themselves at the centre of the action. As a result, Hong Kong is now one of the most expensive markets in the world. Continued strong demand combined with a shortage of office stock has pushed Central Hong Kong rents up– although they are still 10-15% below the last peak prior to the global financial crisis,” he concludes.

The Japan earthquake has not materially affected occupier market conditions elsewhere in the region. Vacancies are trending down in many cities, and office rentals remained on an upswing across most markets in 1Q11. Of the 26 featured office markets, 16 saw an increase in net effective rents during the quarter, while for the remainder rents stabilised or recorded small residual declines. Aggregate rental growth moderated slightly as a result of weakness in Japan, with an average quarter-on-quarter increase across the region of 2.5%. In 4Q10, quarterly rental growth averaged 2.7%.

Jakarta recorded the largest quarterly rental growth of 9.5% in 1Q11 as landlords became more aggressive in raising rentals due to strong net take–up and declining vacancy.

Todd Lauchlan, Country Head for Jones Lang LaSalle Indonesia says, “Recent leasing activity has further demonstrated the breadth of the recovery in the Jakarta office market, with pre-commitment levels for new developments at robust levels ensuring that the overall absorption in 2011 will almost certainly be a record.  We are also forecasting strong rental growth over the balance of 2011 as the vacancy level continues to fall and demand continues to improve on the back of a strong economy.  It is worth noting that in US dollar terms we are only now seeing rents recover to pre Asian crisis levels of 1995-1997 with Jakarta remaining one of the cheapest places in the world to lease office space.  We therefore anticipate a period of catch up as rents move closer to a level more in line with the economic cost of development in this rapidly emerging city”

Rents in Hong Kong followed closely with a further 9.2% increase on the back of a tight supply situation and solid demand by the financial sector. Rents in Singapore grew by 7.9% q-o-q, underpinned by a temporary shortage of space. Rents in Shanghai and Beijing grew by 6 to 7%, with the result for both markets being driven by strong spatial demand from MNCs and domestic corporates. In the twelve months to end-1Q11, Hong Kong delivered the strongest rental performance, with growth of 36%.

Net effective rentals in Tokyo declined by 1.5% as gross rents continued to fall while rent-free periods remained unchanged following the recent disaster. In a few other markets where tenant demand remained weak, rents have either stabilised (e.g., Taipei) or are seeing further declines (e.g., Seoul, Bangkok). Average rents in Australia and New Zealand generally saw moderate movements, both positive and negative during the quarter. Perth recorded the largest quarterly increase of 5.9%.

Investment activity remained buoyant in 1Q11 and sentiment in the region outside Japan has not been dented by the crisis in that country. Almost all major markets outside of North Asia saw either stable or increasing capital values. The largest quarter-on-quarter increases were recorded in Hong Kong and Jakarta, increasing by 13.1% and 11.0%, respectively. The Mainland Chinese cities of Shanghai, Beijing and Guangzhou were next highest with quarterly increases of 7 to 8.5%.

Across the region, the average quarterly increase in capital values in 1Q11 was 3.1%, compared with 2.9% in 4Q10. Again Hong Kong outperformed on a year-on-year basis, recording a 42% increase in capital values on the back of strong buying activity, largely by local investors.

We expect leasing demand to remain solid this year, though vacancies are still set to rise in some markets over the next few quarters due to ample supply additions. Consistent with strong fundamentals, the regional office market is now largely landlord favourable. Rental growth of up to 30% is expected across the region this year, with the strongest growth likely to be seen in supply constrained markets. Tokyo will however see a further delay in recovery and is forecast to record an annual decline of up to 5% in view of the recent events. A few laggards are also likely to see either no growth or some residual rental declines.

Stuart Crow, Head of Asia Pacific Capital Markets says, “Markets across the region continue to be dominated by local investors, with typically the biggest deals being bought by Asian buyers. We continue to see are interest from global investors keen to participate in the growth in Asia Pacific. The result is both rising capital values in most of the markets. Transaction volumes are currently on target to meet our estimated USD 100 billion of deals this year having reached USD 27 billion in the first quarter.”

Capital values are expected to increase in nearly all markets outside of North Asia during 2011, by up to 35%, as rental performance and investor confidence further improve. Markets expected to see the largest growth include Hong Kong, Singapore and the China Tier I cities.