Rethinking the Office Sector in Asia Pacific

TOKYO

SYDNEY

WHILE THERE HAS BEEN A LONG-STANDING DIVIDE BETWEEN PRIME AND SECONDARY STOCK IN SYDNEY, THERE IS ALSO BIFURCATION WITHIN EACH OF THESE GRADES AS WELL.

With the average useful life of an office tower at around 45 years, as per the national tax depreciation, an office building with a vintage of 40 years (an “old building”) can become a reasonable candidate for urban redevelopment. Importantly, many of these older buildings are not necessarily obsolete – they are located in highly desirable locations and although old, tend to be well-maintained by global standards due to high building maintenance requirements, which are comprehensive although voluntary. Because building maintenance standards are voluntary, it is primarily J-REIT landlords that seek asset certification. This presents an opportunity. However, rental premiums for green certification are higher for smaller assets: 5.4% for mid-sized buildings compared to 2.6% for larger buildings 4 . Considering that although a comprehensive building retrofit policy framework does not exist, it is important to note that Japan still requires owners and developers to submit an energy savings plan when undertaking large renovations and therefore improved sustainability credentials will need to form part of an asset optimisation plan. Given the size of the secondary market in Tokyo, approximately 93 msf, a number of assets should benefit from such planning. Older buildings in prime locations, especially owned by landlords who do not have the investment capability for required retrofitting, can be a prime candidate for value-add funds seeking higher risk-adjusted returns. OBSOLESCENCE HAS BECOME A MAJOR INVESTMENT THEME IN JAPAN, DRIVEN BY AN AVERAGE OFFICE BUILDING AGE THAT ALREADY EXCEEDS 33 YEARS.

The pressures on prime quality are slightly different. Firstly, as seen globally, large corporate occupiers are becoming increasingly astute in their space requirements with regard to grade, sustainability, wellness, amenity and more recently technology. This places an onus on landlords to meet these minimum criteria to be considered for any space requirement. Secondly, this has come at a time when not only is vacancy above average on a relative basis at 11%, but is also at its highest level on record in absolute terms at 4 msf. In an increasingly competitive environment, there is more pressure on landlords to differentiate their assets from their competitors’. The recent City of Sydney legislation, which came into effect in January 2023 and affects all grades of stock, means that new developments and major redevelopments of existing buildings will need to comply with minimum energy ratings and achieve net zero energy output by 2026. Clearly this targets the need for energy efficiency as well as the use of onsite and offsite renewables which needs to be incorporated into any development plan.

Within the secondary market, B-grade stock accounts for over-two thirds of the total, with lower grades (C- and D-grade) the remaining 31%, equivalent to 6.5 msf. It is these assets at the highest risk of obsolescence in the office market as they average in excess of 70 years of age and for the most part lack a sustainability rating. Often these are historical buildings and so repurposing will need to take this into consideration. B-grade stock risks obsolescence, but there are greater opportunities for repositioning as evidenced by asset improvements in recent years.

4 Cabinet Office, Green value in real estate market: Estimating of green premium for office market considering the renovation (2022)

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RETHINKING THE OFFICE SECTOR | OPTIMISING YOUR ASSET FOR A NEW ERA | ASIA PACIFIC 38