Rethinking the Office Sector in Asia Pacific

SHANGHAI

THE SHANGHAI OFFICE MARKET, DESPITE BEING ONE OF THE LARGEST IN THE ASIA PACIFIC REGION, REMAINS NOT ONLY HIGHLY COMPETITIVE BUT HIGHLY DYNAMIC.

Further pressure could also come from legislative requirements. Both central and municipal governments have their own net zero road maps, while the financial market is increasingly requiring ESG/CSR reports for listed firms. With tenants looking to lease green office space, and with government directives to follow, more landlords will need to achieve green accreditation for their respective buildings. Nevertheless, given the shorter land tenure in mainland China (typically 40 years for office developments), landlords of older buildings should be mindful of the shorter remaining land tenure when considering any major building overhaul.

It is continually shaped by the quality of existing stock, the amount of new supply completing (45 msf – 27.5% of existing stock – through to 2026) and the construction of new transportation infrastructure. All of which continue to influence occupier decision making. Furthermore, many of these new buildings are in suburban locations which have good access to transport infrastructure with lower asking rents – a double bonus for occupiers. The comparatively short lease lengths, which are standard in the market, add additional fluidity to the competitive leasing environment. Clearly these dynamics will exert leasing pressure on Grade B and older Grade A buildings, especially those that have not been managed or maintained to standard given tenants’ increasing sustainability and amenitisation requirements.

HONG KONG

HONG KONG HAS LONG BEEN A KEY OFFICE MARKET IN THE REGION, AND OFTEN CHOSEN AS THE PREFERRED LOCATION FOR REGIONAL HEADQUARTERS.

With that there is a high proportion of finance and banking tenants, many from multi-national corporations. As is being evidenced the world over, these MNC tenants are becoming more discerning in their space requirements with the foundation being sustainability credentials. More progressive landlords have already started down this route though less than half of office stock by lettable area, approximately 30 msf, has received a sustainability rating with the remaining 37 msf currently unaccredited. Further risks are also seen through the city’s vacancy rate, which currently sits at 17% - the highest level in over 15 years – equivalent to 11.5 msf.

Given the high vacancy and intense competition to secure tenants, landlords need to become proactive in optimising their assets or risk obsolescence. With annual average net absorption at 1.2 msf for pre-COVID years between 2015-19, the market may need at least another 4-5 years to bring down the availability rate from 17% to sub-10% level. While this should act as a significant catalyst for action, as there is no shortage of vacant space, there are wider benefits that can be derived. Within the same submarkets, green-certified offices have outperformed those buildings without such credentials. Observed rental differences typically range from 5% to 25%, while these assets also demonstrate higher occupancy rates, typically in the range of 3% to 5%.

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RETHINKING THE OFFICE SECTOR | OPTIMISING YOUR ASSET FOR A NEW ERA | ASIA PACIFIC 34