Office buildings in Hong Kong’s Central district are seen on March 12. The office sector is performing well in countries across the Asia-Pacific region, but concerns about influential markets elsewhere are keeping investors from making a move. Photo: Bloomberg
Opinion
The View
by Nicholas Spiro
The View
by Nicholas Spiro
Asia’s office sector is thriving, so where are the investors?
Office markets in Asia are performing well and the shift to hybrid working has had less of an impact, yet investment in the sector has fallen sharply
Asia’s office markets need a stronger narrative, one that differentiates the sector more clearly from its counterparts in the US and Europe
Just a cursory glance at office occupancy rates around the world reveals where the commercial property sector’s problems lie. In the United States, average occupancy rates in 10 leading cities stood at just 52.5 per cent at the beginning of March, according to data from Kastle Systems. In Britain, the average rate was a more worrying 35.9 per cent, the level it has stood at for the last year or so, according to Remit Consulting.
In the Asia-Pacific region, by contrast, the average utilisation rate had already hit 65 per cent by the beginning of last year. It was even higher in China, South Korea and Japan, according to data from CBRE.
In fact, some office markets in Asia are performing exceptionally well. In India, leasing activity last year reached its second-highest level on record. Meanwhile, rents for grade A buildings in Seoul grew a staggering 15.2 per cent last year, with the vacancy rate in the city standing at a negligible 1.5 per cent at the end of 2023, according to CBRE.
Yet while Asia’s office markets have been less affected by the pandemic-induced shift to hybrid working, investment activity in the sector has fallen sharply. Transaction volumes last year were 52 per cent below their average level in 2020-22. While the decline was not as steep as in the US and Europe, purchases by investors from outside the Asia-Pacific were a staggering 84 per cent below the average level in 2020-22, according to data from MSCI.
Even in South Korea and Singapore – another resilient office market – purchases by cross-border investors were 25 per cent and 50 per cent below the average level for the preceding three years, according to MSCI.
Why are investors retreating from Asia’s better-performing office markets? The simplest explanation is that the dramatic deterioration in sentiment towards the office sector in the US – where pressure on valuations is most acute amid a toxic combination of more remote working, the aggressive tightening of monetary policy and vulnerabilities in the nation’s banking system – has infected other markets.
The Manhattan midtown skyline is seen as cars move along the Queensboro bridge and a train stops by the Queensboro Plaza Station in New York on February 29. Photo: AFP
Even though Asian office markets have proved more resilient, the sector as a whole has been contaminated by a sceptical, US-centric view of demand for office space. This could explain why US-based investors have been more reluctant to deploy capital in Asia’s office sector.
In contrast, cross-border investors within the Asia-Pacific, as well as domestic buyers, have shown a stronger appetite for offices. In India and Singapore, the volume of office transactions by domestic investors last year was higher than the average level in 2020-22, according to MSCI.
A more compelling explanation is that the Covid-19 pandemic has forced investors the world over to rethink their commercial real estate portfolio strategies. That is especially so in Asia, where offices account for the bulk of investment activity.
Gordon Marsden, head of capital markets, Asia-Pacific, at Cushman & Wakefield, said investors face more “distractions” from other sectors, particularly the increasingly popular alternative sectors which include multifamily properties and data centres. However, “offices will remain the largest contributor to transaction volumes for the foreseeable future,” Marsden said.
Even last year, offices still accounted for most of the investment in the main commercial property sectors in Asia, compared with logistics properties and retail real estate, according to data from MSCI.
Still, Asian offices face several headwinds that are weighing on the outlook for the sector. First, a surge in supply is helping drive up vacancy rates amid a sharp slowdown in demand. CBRE estimates that India and China will account for three-quarters of new office space this year. Yet while leasing activity in India’s fast-growing economy is buoyant, net take-up of office space in China last year was only slightly above 2022’s all-time low.
A man walks between buildings at a commercial centre in New Delhi on February 28, 2023. India and China are expected to account for three-quarters of new office space in Asia and the Pacific this year. Photo: Reuters
Second, many prime office buildings in central business districts across the region are owned by cash-rich privately owned companies that have little incentive to sell. This is partly why prices have been relatively slow to adjust, resulting in a stand-off between buyers and sellers that has been a key factor holding back the recovery in investment activity.
Third, even though office occupancy rates are higher in Asia, developers, landlords, investors and occupiers need to adapt to the new post-Covid world. Tim Armstrong, global head of occupier strategy and solutions at Knight Frank, said “three flights to quality” were taking place: a flight to sustainable buildings, a flight to amenity-rich offices, and a flight to flexible office space.
However, some Asian office markets are benefiting from the challenges faced by occupiers. At a time when companies the world over are prioritising cost control, India – where rental values are the lowest among the leading office markets in the region and whose thriving global capability centres have emerged as innovation hubs – is capitalising on global economic trends. “This is why the Indian [office] market is so strong,” Armstrong said.
Furthermore, Asia’s office markets benefit from a strong domestic investor base that has helped cushion the decline in transaction volumes. This is no more apparent than in Seoul, where well-capitalised local companies accounted for more than 40 per cent of office deals last year, some of them acquiring buildings for self-use to mitigate risks stemming from ultra-low vacancy and brisk rental growth.
This suggests Asia’s office markets need a stronger narrative, one that differentiates the sector more clearly from its counterparts in the US and Europe. The sharp fall in investment activity belies the resilience and appeal of Asian offices.
