03 March, 2011
- Asia Pacific will see the most rapid growth in average occupancy costs globally, with an average annual growth rate of 3.7% to 2015
- Low cost centres in China and India will drive much of this growth in occupancy costs. But, growth in most of these markets is from a low base
- Across global markets, the five markets expected to show the highest increases in costs over the next five years are all in Asia Pacific: Bengaluru, Hong Kong, Singapore, Beijing and Chennai
- Hong Kong enters 2011 as the most expensive office location in the world.
Average occupancy costs in Asia Pacific will grow by an average annual rate of 3.7% to 2015, according to the fourteenth edition of DTZ’s annual ‘Global Occupancy Costs: Offices’ survey, published today. Growth will be driven by above average increases in low cost locations in China and India. For example, occupancy costs per workstation in the southern Indian IT centre of Bengaluru are forecast to increase by an annual average of 9.75% between 2011 and 2015. DTZ Research forecasts that growth in occupancy costs in Asia Pacific will be double the growth expected in EMEA and the US.
DTZ’s survey assesses the main components of occupancy costs in 121 business districts in 47 countries/territories across the globe, ranking each location based on annual costs per workstation in USD. It includes rents and outgoings, such as maintenance costs and property tax.
Growth in Asia Pacific will be driven by expanding demand from multi-national companies, especially in India and China, and limited Grade A space. Vacancy rates will begin to fall, despite the fact that 2011 will represent a peak year in terms of development in the region. Inflationary pressure is also likely to have an impact. In India, double-digit inflation has led to significant increases in outgoings in the past year.
Kate Medlicott, Associate Director, DTZ Forecasting and Strategy Research and co-author of the report said: “The biggest increase in costs globally from 2011 to 2015 will be seen in the southern Indian IT centre of Bengaluru, Hong Kong, Singapore, Beijing and Chennai, underpinned by solid rental growth. However, the growth in costs in Bengaluru and Chennai is from a very low base and these markets will continue to offer value to occupiers. Both markets are currently ranked in the bottom 20 of our global ranking, and we expect them to remain there to 2015.”
The ‘Global Occupancy Costs: Offices’ report reveals that during 2010, although global average office occupancy costs showed no change, there was significant movement in costs between regions, driven by the two-speed global economic recovery. Costs re-bounded sharply in Asia Pacific, where average office occupancy costs increased by 9.7% (using USD conversion), and in Central and South America. However, occupiers in the vast majority of EMEA and North America continued to benefit from cost savings.
Fuelled by the economic recovery, Hong Kong entered 2011 as the most expensive office location in the world. Occupancy costs per workstation in Hong Kong’s prime district of Central and Admiralty surged by 31% year-on-year (in local currency) in 2010. This pushed Hong Kong up from second in 2010 to first in 2011, ahead of London’s West End, Geneva, Tokyo and Zurich. The increase in Hong Kong was driven by a surge in prime rents on the back of healthy demand and a shortage of space.
David Green-Morgan, Head of Asia Pacific Research at DTZ comments: “Hong Kong is traditionally a volatile and cyclical market, responding very quickly to economic highs and lows. This is reflected in the fact that the prime rent took only one year to recover its ground in the wake of the financial crisis. We forecast that Hong Kong will continue to outpace other markets in the region, with the gap between it and other centres widening as occupancy costs increase by USD 9,190 to reach USD 31,520 by 2015. This will be driven by rental growth on the back of strong occupier demand and tight availability.”
DTZ’s report also compares the cost of occupying prime and secondary space in select markets. Hong Kong is the most expensive location in the world for occupying secondary space, as well as prime. The biggest difference in the cost of occupying prime and secondary space in Asia Pacific is seen in Shanghai (Jingan), where occupying prime space costs 80% more than taking space in an average grade building.
Adam Catchpole, Head of DTZ Occupier Services for Asia Pacific said: “Occupiers are responding to rising occupancy costs in the prime Hong Kong Central and Admiralty market by considering other Hong Kong sub markets, including Kowloon and Island East, and thinking about which parts of their business need to be occupying prime space. Occupiers are also focusing on using prime space more efficiently, for example through the use of flexible working and shared services.”
Within Asia Pacific there is a big difference in costs between the mature and emerging markets. Alongside Hong Kong, other mature markets including Tokyo, Sydney and Singapore are amongst the top 30 most expensive office locations globally. In contrast, emerging markets such as Bengaluru and Chennai are amongst the least expensive globally. The 10 least expensive office locations globally are dominated by tier two cities in mainland China, although many, such as Shenyang, experienced a big increase in occupancy costs during 2010 as a result of extreme competition for a very limited amount of prime space.
Despite the overall increase in average occupancy costs in Asia Pacific, costs fell in a number of markets. Occupiers in Hanoi saw the largest decrease in occupancy costs per workstation in Asia Pacific in 2010, falling 14% in local currency. A combination of weak demand and ongoing new supply benefitted tenants in both Hanoi and Ho Chi Minh, as pressurised landlords upped incentives in an attempt to let space. Other markets to witness declines in occupancy costs included Tokyo, Canberra, Wellington and Dalian, although Tokyo still entered 2011 as the second most expensive location in Asia Pacific and fourth globally.
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