News

The shift to a hybrid work model is forcing landlords to upgrade office spaces.

Investors and occupiers set their sights on Indonesia, India, and China.

Analysts say cold storage investments are viable because of burgeoning demand underpinned by the pandemic.

Grade A offices in Seoul, Taipei, Ho Chi Minh City and prime industrial spaces in Australia are top picks.

Sales reached nearly US$2bn, accounting for 39% of total annual transactions.

With most rental waivers coming to an end, developers and landlords mull over a way forward.

Some sectors’ actual performance was better than anticipated.

That is compared to the 5-year average of 11.3m sq ft.

Occupational demand in the KL Fringe was also under pressure at 85.8%. The cumulative supply of office space in Klang Valley stood at circa 109.5 million sq ft as of 2H2020 following the completion of Menara TCM in KL City and Menara Star 2 @ Pacific Star in Selangor. Located at the intersection of Jalan Tun Razak and Persiaran Stonor, Knight Frank says the 32-storey Menara TCM was completed in November 2020. The GBI and LEED Gold certified office building offers circa 372,000 sq ft net lettable area (NLA) space and 745 car parking bays. Its typical floor plates are sized from 14,200 sq ft to 15,800 sq ft. Menara Star 2 forms part of the larger mixed-use development of Pacific Star in Seksyen 13 of Petaling Jaya. The latter comprises two office towers, three condominium blocks and a retail podium with a total of 1,875 car parking bays. The 14-storey GBI certified office tower offers circa 251,000 sq ft NLA and comes with typical floor plates of 8,700 sq ft to 14,000 sq ft and slab to ceiling height from 3.8m to 5.5m. Here’s more from Knight Frank: By 1H2021, 12 office buildings are scheduled for completion with nine located in KL City and the remaining three in Selangor. Upcoming completions in the city are Affin Tower and HSBC Tower, both in TRX; The Stride Strata Office, TS Law Tower, UOB Tower 2, Permata Sapura, Menara Great Eastern 2, Legasi Kampong Bharu and Plaza Conlay @ Conlay 301 while in Selangor, they are HCK Tower @ Empire City, Quill 9 Annex and Imazium @ Uptown. Collectively, these completions will add circa 4.9 million sq ft of space to the existing cumulative office supply. Amid growing challenges in the office market, the overall occupancy rate of purpose-built office space in KL City dipped further to record at 69.1% as of 2H2020(p) (1H2020: 69.8%). Similarly, the occupational demand in KL Fringe was also under pressure during the review period and was analysed at 85.8% (1H2020: 86.2%). The overall occupancy rate in Selangor dropped to 77.9% as well during the same period of time (1H2020: 78.4%). There were several notable office related announcements during the review period. Following delays arising from the implementation of various stages of MCO, Phases 1 and 2 of the Merdeka 118 project are expected to be ready by 2Q2022 instead of end 2021. Phase 1 of the development involves the Merdeka 118 office tower and surrounding infrastructure. As of October 2020, the tower is 60% completed with the concrete core structure at its peak (Level 118) and the tower facade at Level 82. Upon completion, it will be Malaysia's tallest building and the second tallest tower in the world as well as the first building in Malaysia to satisfy the triple green building platinum accreditations locally and internationally, namely the Green Building Index (GBI), the Green Real Estate (GreenRE), and the Leadership in Energy and Environmental Design (LEED). The construction of Phase 1 of Bandar Malaysia is expected to commence by June next year, with the kicking off of infrastructure works. In the first phase spanning across 20.23 hectares, there will be several Grade A office towers, hotels, serviced apartments, and luxury residences, which will be developed over four years. Phase 1 of Bandar Malaysia will house more than 12 world-class towers with total gross floor area (GFA) exceeding 12 million sq ft. Estimated to generate a GDV of over RM200 billion, the prime national economic project is expected to resuscitate and jumpstart the Malaysian economy. Sunsuria Bhd, via the acquisition of shares in Bumilex Construction Sdn Bhd, plans to develop two plots of land along Lorong Tuanku Abdul Rahman measuring about 0.47 hectare in total into a high-rise mixed commercial project known as Nadi @ TAR. The project has an estimated GDV of RM524.8 million and will feature seven storeys of retail space, 22 storeys of office suites, a 10-level parking lot as well as three storeys of office space with a multi-purpose hall and one storey of retail space. The construction is set to commence in 2H2021 and scheduled for completion by the end of 2025. KLCC Real Estate Investment Trust (REIT) had, in November, announced the extension of leases with Petroliam Nasional Bhd (Petronas). The extended leases of the office space within Menara 3 Petronas and Petronas Twin Towers will be for a further term of 15 years upon the expiry of the current term, which is 14 December 2026 for Menara 3 Petronas and 30 September 2027 for Petronas Twin Towers. The rental amounts would be determined prior to the commencement of the extended leases. Currently, Petronas is paying circa RM9.00 per sq ft per month and RM11.00 per sq ft per month for Menara 3 Petronas and Petronas Twin Towers respectively. KL33 Properties had unveiled the first ‘Covid Secure’ office space at Menara KL33 in August 2020. A first-of-its-kind in Malaysia, the fully furnished ‘Covid Secure’ office space are specifically reconfigured and retrofitted according to the one-metre physical distancing rule to prioritise the safety, health and wellbeing of occupants and tenants. Along with the refurbishment, KL33 Properties has also introduced ‘Easy Lease Programme’ to help companies to bring their workforce back to office safely without the exorbitant initial set-up costs. Following the disposal to Techvance Properties Management Sdn Bhd in 2015, the 13-storey premises of AmBank Group Leadership Centre at Jalan P Ramlee, is being redeveloped and repositioned into a 180-room hotel. The 26-storey hotel, which will operate as Hotel Indigo Kuala Lumpur on the Park in partnership with InterContinental Hotels Group (IHG), is scheduled to open by 2023. The Jewel, one of the final components of the i-City development, will house an international 5-star hotel and state-of-the art Grade A office. The 70-storey skyscraper is set to be the tallest building in Shah Alam when completed by 2025. The master development of i-City is a 72-acre freehold ultrapolis located along the Federal Highway. The project, with a gross development value (GDV) of more than RM10 billion, comprises corporate towers, cyber office suites, serviced residences, hotels, data centres, a convention centre, and the Central i-City shopping centre.  

The shift to online shopping will reduce demand for retail space, a credit negative as per Moody’s. Moody’s Investors Service says in a new report that the coronavirus pandemic is accelerating changes in consumer and worker preferences, with widespread implications for property companies in the region. “Before the pandemic, social risks such as health and safety were low for property companies,” says Stephanie Lau, a Moody’s Vice President and Senior Analyst. “The pandemic has brought these risks to the fore as employers and retailers adjust their physical spaces, processes and IT in response to changing behaviors and expectations, which means that property companies must also adjust.” As the shift to online shopping accelerates, retail space consolidation will reduce property companies’ revenue and cash-flow predictability, as well as increase their operating costs as they invest in IT to retain retail tenants and consumer foot traffic in their shopping malls. For instance, malls in Hong Kong SAR and other Asia Pacific cities have already launched mobile apps to expand their customer loyalty programs. Although the pandemic has raised the proportion of online shopping in certain Asian markets, in-person shopping will not disappear completely. For example, over 70% of surveyed consumers from Singapore and Hong Kong still value in-store shopping, well above the global average of 55%, according to a report by Adyen Singapore and the Centre of Economic and Business Research. As with retail, flexible work arrangements will likely reduce office rents and shorten lease durations as companies seek greater flexibility and adjust long-tenure leases. But population density, along with work cultures and IT infrastructure will affect the pace and degree to which employers and office property companies in Asia Pacific adapt to changing office needs. Subscribers can access the report “Real Estate – Asia Pacific: Pandemic accelerates changes in consumer and worker preferences, raising social risks” here.  

Land for commercial use will increase to 1.47 square km, or 4% of the total land area.

The work-from-home setup is not likely to significantly reduce demand. When COVID hit the world, the accompanying lockdowns brought the term Work(ing) From Home (WFH) from the margin to the mainstream. This sounded alarm bells around the world, from savvy investors like Warren Buffet to analysts and other market watchers, thinking that the age of the CBD office market is over. Those who believe that WFH will significantly reduce demand for office space have valid reasons but Savills notes that their concerns about demand have not been articulated considering the following: 1. The discrete nature of office leasing terms 2. Time domain 3. New demand By not accounting for these factors, any analysis of the market is likely to fall short of the mark. Savills analyzes the Singapore CBD Grade A Office market to look at how it may permutate over time after we adjoin these three extensions to the mainstream WFH belief that there will be a sharp climbdown in demand. From a list of permutations, Savills inputs their prior probabilities as to which of these are likely to play out in future. This approach is in sharp contrast to providing a singular outcome after just one round of reasoning. Here’s more from Savills: DISCRETE NATURE OF LEASING TERMS This is closely related to the time domain factor. This is because thus far, market observers are mentally forming beliefs which assume that WFH can be instantly mapped to reality. Unfortunately, as a typical office lease contract spans between three and (increasingly) five years, demand may remain relatively constant in the short to medium term. To get to the percentage of leases expiring this year and over the next two years, we looked at the leases expiring in terms of Net Lettable Area (NLA) from the five listed Singapore Commercial REITs CBD portfolios. Graph 1 shows the average leases expiring for the REITs (please note that this is a simple average and not weighted by NLA). For 2020, this is just 9.4% but rises to 24.7% by 2021 before falling to 15.6% in 2022. If we assume that the sample from the five commercial S-REITs listed here fairly represents the universe of CDB Grade A office space here, and if tenants upon lease renewal or expiry decide to reduce their CBD Grade A office footprint by 30%, this action alone will lead to the following increase in vacancy levels over the end-2019 occupancy of 4.4%. The cumulative increase in CBD Grade A vacancies for these three years is 14.9%. (These are just numbers calculated from existing tenants reducing their office space usage. We have not factored in new demand and office buildings taken off the market for redevelopment or retrofitting works.) Owing to the discrete nature of lease renewals, the increase in vacancy levels from 2020 to 2022 will be a series of small stepped down functions. That is, instead of the sudden drop in vacancies, the decline is more gradual (See Graph 3). In other words, because of the discrete length of lease terms, what tenants may wish for in terms of rightsizing their office footprint, cannot be carried out immediately. TIME DOMAIN If the sampled profile of lease renewals and the expected vacancy uplifts translate to our basket of CBD Grade A office buildings, then the much-dreaded contraction in demand would not happen overnight, but in phases. With this stretching of time, other factors come into play which may (or may not) be positive for the market and could (or not) mitigate, supplant or more than overcome the decline in the spatial needs of existing market tenants. There are a couple of points that we have to consider when we add time to the analysis. 1. By 2021, most sectors of the economy will have rebounded significantly on a quarter-on-quarter (QoQ) basis. 2. Landlords may take this opportunity when demand is weak to redevelop their buildings. 3. Physical completion of offices originally slated for 2021 and 2022 has been delayed for nine months due to the construction stop work orders. The final move-in date is prolonged as tenants are faced with further delays at the fit-out stage. All these factors work towards dissipating the negative forces acting on office demand. NEW DEMAND The WFH movement and reduced real business activity are likely to lead to a contraction of pre-COVID core office demand. However, the effects of the pandemic have not been uniform across all sectors. In Q2/2020, all sectors of the economy registered negative YoY growth, with the exception of the finance and insurance industry. International trading of equities, derivatives and other financial instruments have been rising during this period. Those departments within financial companies involved in such activities should at least sustain their current levels of office space usage. But moving forward, there could be growing demand from technology and social media related sectors. CONCLUSION The landscape of Singapore’s CBD office market is likely to change a fair bit in a world with COVID. However, don’t expect an overnight contraction in office demand because office lease expiries are phased out over time. When we factor in the possibility of landlords using the softer market conditions to redevelop their buildings, the delay in new supply caused by the construction stop work orders and the emergence of new demand drivers, the overall impact on the Singapore Grade A CBD offi ce market may not be as negative as some would have you believe.  

The low to mid-income could expect increased government support next year. To safeguard the Malaysian economy against the adverse impacts of COVID-19, Budget 2021 has set a record to be the biggest Federal Government allocation in Malaysia, with a sum of RM 322.5 billion or around 20.6% of GDP.

Luxury volumes have been volatile recently with July’s buoyant mood quickly dissipating due to a third virus wave. Luxury volumes have been volatile over the past few months with the buoyant mood in July quickly dissipating due to a third wave of virus infections and heightened social tensions. According to Savills, total luxury volume (HK$20 million +) surged to 282 in July, the highest in 2020, before falling back to 153 in August. The combined number of transactions for the two months (435) was still slightly ahead of the 419 transactions completed in April and May, though. The sale of 37 Shouson Hill Road in Southside for HK$2.5 billion to Hang Lung Properties was the most significant deal of the quarter, with the developer planning to redevelop the former US consular staff quarters into super luxury detached houses, targeting completion in 2024. Elsewhere two other house sites were sold to investors / individuals eyeing redevelopment, reflecting a firm appetite for developable sites at the top end of the market. Though market sentiment was mixed at best, luxury prices on Hong Kong Island and in Kowloon declined marginally by 0.1% and 0.5% respectively in Q3, as only a handful of distressed assets changed hands. Here’s more from Savills: The New Territories market, in particular houses, continued to attract buyers, given the appeal of low density living, ample outdoor space and the availability of parking, and luxury prices rebounded for a second consecutive quarter by 2.6% as a result. A quick comparison of average house prices by district reveals the substantial price differential between the Peak (with an indicative price range of HK$55,000 to HK$105,000 per sq ft) compared with Sai Kung (where typical average prices range from HK$11,800 to HK$17,500 per sq ft), the latter almost one-fi fth of the former. This phenomenon adds to the appeal of New Territories houses to potential buyers, especially for those who did not need to commute to the CBD frequently. Mass market supported by secondary market revival The mass market was in a buoyant mood with reviving interest in the secondary market due partly to lower down payment requirements from Mortgage Insurance Programme. The secondary transaction volume totalled 25,327 over the first seven months in 2020, a 1.4% rebound from the same period last year. The primary market saw fewer transactions as developers held back project launches due to the uncertain environment, while some were more focused on clearing backlog units with more aggressive incentives. From 2016 to 2018, developers were aggressive in primary launches with the number of primary unit launches (averaging around 20,000 per annum) consistently higher than the number of units being sold (averaging around 17,000 per annum). 2019 saw this trend reverse for the first time and this remained the case over the first eight months of 2020 with only 6,500 primary units launched but more than 9,000 primary units sold, representing a change in launch strategies by developers over the past 18 months when market sentiment has become more subdued. Outlook The potential reintroduction of the vacancy tax could see further changes to primary launch strategies in the near future. Assuming the proposed vacancy tax to be effective from 2021 onwards, as many as 8,600 completed but not yet sold units would be subject to the 5% levy on sales price on an annual basis, which would most likely prompt developers to speed up sales of such units. Adding another 54,000 units under construction (construction which began in 2019 or before) but not yet sold or launched, the primary launch pipeline in 2021 could be substantial, in particular given the cautious launch programmes witnessed this year. Looking ahead, the full impact of COVID-19 may be felt towards the end of the year if the government tapers subsidies and we see more corporate layoffs pushing unemployment rates to new highs. The unemployment rate currently stands at 6.1%. With uncertain economic prospects and a volatile stock market, residential volumes and prices may have to endure a bumpy ride to the end of this year. Luxury apartment prices on Hong Kong Island have fallen by 8.6% from their previous peak in Q2/2019 and are expected to slip by a further 3% to 5% towards the end of this year given the uncertain environment. Looking into 2021, with economic growth expected to remain weak, unemployment expected to hit new highs and developers likely to accelerate launches, luxury prices may come under further pressure, possibly declining by another 5% to 10%. Low interest rates and ample liquidity will provide some market support, however. Difficult variables to predict include the containment of COVID-19, future US-China relations, and the possibility of resurgent social tensions.  

The increase in APAC investment volumes was driven by China (-10% yoy), South Korea (-2% yoy) and Japan (-18% yoy). Commercial real estate markets in Asia Pacific had a better third quarter this year than second quarter, led by investment in China, Japan and South Korea.

CBD Grade A office rents may settle at a lower baseline, says Savills. Grade A CBD offices saw occupancy levels decline from 94.3% in Q2/2020 to 93% in Q3/2020 due in part to tenants giving up shadow space upon lease renewals or pre-termination arising out of business closures.