Buyers face dilemma in Jakarta’s sluggish strata-title office market

Investors purchasing for sublease face tight competition from unabsorbed spaces in the market.

Total additional supply in Jakarta is expected to reach about 380,000 sq m in 2021, relatively in line with 2020 supply, and Colliers’ pipeline projections for 2022. Based on current progress, all construction of supply pipeline projects in 2021-2022 will be completed on time. 

According to Colliers, in 1Q 2021, Menara Binakarsa (previously known as Graha Binakarsa) in Jalan Rasuna Said was re-opened to bring the cumulative supply in the CBD to 6.89 million sq m. Despite slower progress in construction, some office projects are still in line to meet completion dates in 2021. Total office supply in the CBD will reach 7 million sq m in 2021, an increase of around 3.5% YOY. Outside the CBD, the opening of Menara Tendean (M Ten) brought total supply to 3.60 million sq m in 1Q 2021. Four other office buildings are expected to be completed in 2021, with total supply  increasing by around 4.5% YOY.

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The strata-title office market is in a shaky period. Low sales per year in 2020 continued to put pressure on selling prices. Some owners are offering units at lower than the current market price, especially in the secondary market. Buyers are also facing a dilemma in terms of purchasing either for investment or to sublease. Investors purchasing for sublease must be prepared to face tight competition from unabsorbed spaces in the market. In addition, the rental rate continues to fall, and it is possible owners will see returns far from the expected yield. Other than that, buyers must still pay service charges, and calculate whether the amount will be in line with the projected increase in selling price in the following year.

In 1Q 2021, we recorded some new vacant spaces in office buildings in the CBD selling at prices higher than the market, bringing the average to IDR57 million. Outside the CBD, the average selling price was relatively stable QOQ, registered at  IDR36 million.

Hybrid working model to maintain demand level

Uncertainty still looms on the horizon for many office-based business owners, which means now is not the best time to expand or commit to new office leases. A rise in vacant spaces continues – boosted by an increase in tenant-controlled stock, as occupiers offload surplus space. 

However, the commitment of several tenants has helped maintain average occupancy rates in 1Q 2021, at 80.7%, which is relatively stable QOQ. Meanwhile, newly opened office buildings  outside the CBD have also showed an increase in occupancy rates. However, the slowdown in business activities due to the pandemic has put more pressure on tenants, encouraging several to leave, thus reducing the occupancy rate of the buildings they occupied. 

The occupancy rate outside the CBD was registered at 79.7% in 1Q 2021, a fall of about 1% compared to 4Q 2020. Our forecasts for 2021 see average occupancy rates declining by 2%, compared to 2020, both in and outside the CBD. In any case, occupancy in the 2020-2021 period will register below figures seen during the financial crisis in 2008-2009.

Oxford Economics has forecast an improvement in GDP growth in Indonesia GDP in 2021. This is expected to encourage business activity and prompt a rebound in office demand. However, the market will still be faced with a large supply in 2021-2022. Other than that, the dip in occupancy has also been driven by an increased focus on space utilization, with many occupiers adopting an unassigned hot-desks system in place of traditional private cubes and offices. These trends have pushed down the average area needed per employee. The pandemic-induced adoption of large-scale remote working may well push occupancy down further. 

The hybrid work concept, combining remote working with office use, must be developed by companies before it is adopted. Changes in office layout and adoption of the shared desk concept must be well thought out to optimize the new workspace. The pandemic may see companies seek greater efficiency and consider adopting a hub-and-spoke office model, which would make it less important to maintain large headquarters offices in CBD.

The adoption by companies in Indonesia of the hub-and-spoke office model will likely arise as a topic of discussion. Providing satellite offices for employees (the spokes), in addition to the main office (the hub) is expected to offer employees easier access to a professional workspace. Some benefits include providing options for companies related to location, a better work-life balance by reducing commute times and an increase in productivity. This scheme is expected to boost office absorption particularly outside the CBD, for both traditional and flexible Workspaces.

Rental tariff still wait a momentum to improve

The office leasing market will continue to favour tenants in 2021. Landlords in oversupplied markets are advised to prioritize securing good quality tenants over obtaining higher rents. Landlords must also be more accommodative by offering incentive packages, shorter terms and optionality in new leases. Conversely, the mild down cycle makes it imperative for occupiers to capitalize on current weak leasing sentiment to negotiate better terms before the window of opportunity closes. 

In 2021, supply growth will remain high, and market sentiment has yet to fully recover. These factors, coupled with the WFH trend, are likely to lead to requests for a reduction in office space. Weak demand and the continuing increase in vacant spaces are factors that are conspiring to depress rents, impacts of which are the negotiation of greater discounts and continuing pressure on office rents. In 1Q 2021, average CBD rent was registered at 255,185 Indonesian rupiah, a drop of about 1% QOQ. Outside the CBD, average rent was recorded at 181,287 Indonesian rupiah, a 5% decline QOQ. The inevitable rent correction is likely to manifest up to the end of 2021. In 4Q 2021, rents in the CBD and outside the CBD  rent are expected to decline further, by about 2% and 6% YOY, respectively.