Office rents in Southeast Asia remain reasonable

SEA office rents remain reasonable compared to world’s most expensive office markets – Premium office occupancy costs in Singapore rank 14th worldwide, driven by technology firms and traditional banking and finance sectors

SEA Office Rents Rank among World’s Top

Five Southeast Asian cities rank in the world’s top 86 most expensive premium office rental markets, according to the fifth edition of JLL’s Premium Office Rent Tracker (PORT).

In this fifth edition of JLL’s Premium Office Rent Tracker (PORT), JLL compares like-for-like occupation costs across 86 major office markets in 73 cities. PORT comprises the key elements of occupancy costs – net effective rent, service charges and government tax on rent – all standardised to enable true international comparisons. While only a fraction of a city’s corporate base will pay premium rents, PORT provides a useful barometer of relative costs.

The report, which compares occupancy costs for premium office buildings across the world’s leading real estate markets, reveals that Singapore holds the 14^th spot worldwide, with net effective rents and occupancy costs running US$117 per year per square foot. That is slightly more than half the premium rents in Hong Kong’s Central district, the most expensive submarket.

KEY HIGHLIGHTS OF SEA OFFICE RENTS

• Occupancy costs continue to increase for premium offices
  Occupancy costs for premium buildings have continued to rise in major office markets over the past year, despite many markets being in a late-cycle phase. Costs have grown by an average of around 4% in U.S. dollar terms during 2018.
• Supply is on the rise – but vacancy remains low
  Globally, the supply of premium space is gradually expanding and, while there is now greater occupier choice, premium space is still not in abundance. Among the top office markets, the overall vacancy rate remains in the low single digits – and as tight as 1.5% in Tokyo CBD, 2.7% in Berlin and 3.2% in Beijing.
• Rental growth set to decelerate in 2019
  Growth in occupation costs is likely to slow down in 2019 as new supply comes through; however, while rental growth is expected to decelerate, there are very few major markets where a downward correction is projected for 2019. In fact, the delivery of new premium buildings will set fresh rental benchmarks in several markets.
• Affordability is still a concern as corporates look for alternatives
  Affordability continues to be a concern, particularly in the top tier of markets such as Hong Kong, New York and London, although considerable discounts can still be found in other well-located business districts within these cities. More affordable cities are also attracting significant corporate interest, including in Europe (e.g. Amsterdam, Berlin and Warsaw), Southeast Asia (e.g. Ho Chi Minh City and Manila) and select secondary markets in the U.S. (e.g. Dallas and Atlanta).

Financial services drives premium rents
The banking and financial services industry continues to be the main driving force of premium office rents, particularly in the ‘high-end’ and ‘mid-level’ markets. In more affordable ‘value’ markets, legal, technology, professional and business services and retail are playing a more important role.

“Corporate occupiers are seeking to consolidate and streamline their portfolios in strategic locations. There is a growing recognition of the role that real estate plays in talent attraction and retention and innovation and collaboration, as well as the importance of transport connectivity, local amenities and the quality of digital infrastructure.

User experience now has a central role in the design of new office environments. There is a shift towards increased flexibility and choice over how and where employees work, while cutting-edge technologies, such as virtual
and augmented reality, are being integrated. High-quality services, ranging from food and beverage offers to recreation spaces and gyms, are becoming standard features in premium locations, as employee well-being moves to the core of occupier concerns.”

SEA office rents

The office rents in the other five ranked Southeast Asian cities were considerably less expensive as well, including Ho Chi Minh City (38^th, $78/sq ft), Jakarta (55^th, $60 sq ft), Manila (66^th, $54/sq ft), Bangkok (77^th, $46/sq ft) and Kuala Lumpur (85^th, $30/sq ft).

While the banking, financial industry sectors continue to be the major occupiers of premium office space globally, technology firms – in particular, online platforms – are playing a greater role in propelling demand for premium office space. Based on Singapore Economic Development Board’s statistics, 80 of the top 100 global tech companies, and 4,000 over home-grown and international start-ups from around the world have established their operations in Singapore. These include internet companies Google, Facebook and LinkedIn, new economy firms engaged in e-commerce or online businesses such as Shopee, Razer and Grab, as well as technology hardware manufacturers like Acer, Apple, Dell and Siemens.

SEA Office Rents in Tracked Markets

The average total occupancy costs of the five tracked markets in Southeast Asia are as follows:

Chris Archibold, Head of Leasing, JLL Singapore says: “Tech firms have been prioritising Singapore as a key hub due to the government’s supportive policies and the conducive business environment here. The smart nation digitalization plans have also helped to fuel the growth of this sector. Though some of the occupational demand created is going to business park locations, the sector has also been a significant driver of grade A office space due to the need to attract and retain top talent.”

Other SEA Office Rents may Pose Challenge to Singapore

Other gateway cities in Southeast Asia, including Jakarta and Ho Chi Minh City, are now competing with Singapore to become the next Silicon Valley. Specifically, their fast-growing tech start-up ecosystems are diverting some of the attention of venture capital and private equity investors from Singapore. They may eventually challenge Singapore for its position as Asia’s investment and innovation hub.