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News Release

Taipei

Jones Lang LaSalle’s 3Q13 Commercial Property Market Survey Highlights Taipei-2 October 2013


 
  • The Taipei office market has sustained the trend from the last quarter and continues to experience further slowdowns because of the uncertainties posed by quantitative easing (QE) policy developments in the United States, recession of the Eurozone and surpluses of productivities in China. Thus, foreign and domestic think tanks and government agencies have declared a drop in economic growth in 3Q13 and have further revised their economic growth projection downward for the upcoming quarters. However, the current quarter’s take-up has tremendously increased from 3,722 ping in 2Q13 to 13,910 ping, 70% of which comprise owner occupancy.
 
  • The total take-up of the first three quarters this year has reached 33,545 ping—the highest in five years—because corporations consolidate their operations and begin to establish headquarters. Over 60% of the aforementioned take-up is committed to headquarters use.
 
  • The slow leasing market is evident, with merely 40% of the quarterly take-up involving new leases and lease expansions. Compared to the past five years’ third quarters, our record for 3Q13 has shown that several corporate tenants have surrendered their leases or relocated to Grade B buildings or city fringes, although the figure this year is within the quarterly average. The quarterly vacancy rate increased 0.8 pps q-o-q, reaching 11.1% because of the relocations and the entrance of one new building to our monitored basket in the Xinyi submarket.
 
  • During the current economic slowdown, corporate tenants tend to be more cautious on making lease decisions. Furthermore, because the market has started seeing tenants relocating to cheaper offices and several new buildings have gradually entering the market, landlords have tended to be more discreet on adjusting rents. The rental value only increased marginally by 0.1% q-o-q to NTD 2,445 per ping per month.
 

  • Relocations to and new leases in industrial offices have driven the vacancy in city fringes down by 1.5 pps to 7.9% biannually. The increasing demand for such office spaces has caused the average rents to increase by 0.3% biannually to NTD 1,317 per ping per month.

 

  • Taipei New Horizon, a brand-new building offering more than 12,000 ping of floor area, opened in the Xinyi submarket this quarter. Because of the new supply and the surrendering of office spaces, the vacancy in Xinyi submarket increased by 2.6 pps q-o-q to 16.5%. However, the quarterly take-up increased significantly to 5,868 ping from -105 ping in 2Q13 after one corporate tenant leased approximately 2,200 ping of space in Taipei New Horizon. Rental value remained at NTD 2,774 per ping per month.

 

  • The expansion of MNCs and the landlord’s subsidiary renting spaces caused the vacancy of Dunhua North to drop further for the fourth consecutive quarter by 1.6 pps to 10.2% q-o-q. Because of the continued decrease in vacancy, certain landlords continued to raise rent, marginally pushing the area’s average rent upward by 0.5% q-o-q to NTD 2,266 per ping per month. The increase is the most significant among those in the four submarkets this quarter.

 

  • Because one domestic corporation surrendered spaces and the new leases consist of only small-sized to mid-sized units, the vacancy in Dunhua South edged up marginally by 0.2 pps q-o-q to 5.8% in 3Q13. Certain landlords who have raised rents pushed the rental level to edge up slightly by 0.1% q-o-q to NTD 2,449 per ping per month.

 

  • Several new leases committed to small-sized to mid-sized units, as well as owner occupancy in the Non-Core CBD drove the area’s continuously dropping vacancy. Furthermore, the aging Grade B buildings have gradually faced the need for renewals or reconstructions. Several building owners this year have either terminated all leases and retrieved the buildings to convert them into hotels or demolished them to be redeveloped into luxury residences. Thus, some of the former corporate tenants from these buildings have stayed in the noncore CBD and taken up some of the Grade A offices. Vacancy has showed its third consecutive drop this quarter by 0.6 pps to 6% q-o-q, while rent has posed its first drop since 2011 by 0.3% to NTD 1,924 per ping per month because several aged buildings lowered rents to attract tenants.

2013Q3-en

Future Trends
  •  International think tanks and domestic government agencies have declared an economic slowdown this quarter and further stated that there have not been any obvious signs of economic improvements in the near future. However, economists have projected that the rebound might occur in 2H14. But, it is difficult to be certain because the effects of federal budget cuts, developments of QE in the United States, Euro recession and recovery of the Chinese economy from an earlier fallback—among other factors—all require time to sink in and to observe their developments. Thus, in the near future, the business sentiment of most of corporations is likely to remain cautious. On the other hand, Chinese corporations would likely take advantage of the alleviations in the service industry trades and tourism limitations and become more active and aggressive on conducting businesses in Taiwan.

 

  • Because of the current global economic stance, reducing costs and expenditures has remained an important agenda for businesses. Many business entities have begun to consolidate their operations into one single location to save costs or to sell self-owned buildings and leaseback. Thus, we have seen many new headquarters being erected in Taipei in recent years, and properties—such as the headquarters of Elitegroup Computer in Neihu and the Park Lane retail property in Taichung—were sold by the owners and have been leased back. In 2013, there have been nearly 21,000 ping of headquarters take-up and owner occupancy floor areas. Compared to 2012, the growth rate is 189%. More corporate headquarters are expected to be completed in 2014.

 

  • In terms of rental performance in the short run and under the current economic conditions, most corporate tenants tend to retain their current leases. Yet, with many new buildings adding to the supply, market competition is likely to occur among landlords. Thus, landlords have been more cautious when adjusting rents under the current circumstances, especially when more new office buildings are planned to open in the next quarter or two. In the long run, the rental level is likely to grow moderately as Taiwan’s Financial Supervisory Commission (FSC) has required insurers to obtain a minimum ROI of 2.875% on leases upon their acquisition of rental properties.

 

  •  The Taiwanese government has lowered the trade barriers for the service industry and the tourist limitations for China this year. Our market record has shown that several Chinese financial service entities began to enquire space availabilities in Taipei. Additionally, according to the official statistics, there have been nearly 2 million Chinese visitors who came to Taiwan from January to August this year, resulting in a 12% increase y-o-y. Thus, we expect that improvements in the cross-strait relationship are likely to bring momentum to the office market growth in Taipei.

  • More than 63,000 ping of new office supplies are anticipated to enter Taipei’s office market this year. Because of the slow office demand and the moderate rental growth in Taipei’s office market, an increasing number of property owners have hoped to take advantage of the booming tourism industry. Thus, several major landlords have acquired, retrieved or leased buildings for hotel uses. This quarter, we have seen one hotel operator leasing a brand new structure to operate an economical hotel. This has been a rare case as new buildings are normally used for five-star hotels while older buildings are often converted to economical ones.
Joe Lin (Local Director) made the following comments:
“According to our regional team, major cities in the Asia Pacific (AP) region shared similar trends for the leasing market this quarter. Vacancies in most cities fell marginally by 0.3–0.9 pps q-o-q, with the exception in Taipei, where the new building supply slightly increased the vacancy. Rental values merely fluctuated marginally by ±1%, except in Tokyo. Certain landlords in Tokyo’s market reduced rents to attract tenants, causing the overall rent to drop by nearly 4%. On the other hand, the average rental value in Shanghai soared by 2.1% q-o-q, mainly because of the second consecutive drop in vacancy. Certain landlords raised rents, causing the overall rental to rise. It is the most significant increase among major AP cities this quarter. Leasing activities are generally slow in the AP region this quarter, as take-up decreased in places such as Singapore, Hong Kong, Shanghai and Beijing. Under the current economic slowdown, corporate tenants in all major AP cities, except Tokyo, have tended to relocate to the peripheral areas of major CBD or city fringes. Thus, we could see that the current economical prospect have affected the AP region as a whole.
 
In the domestic front, Jones Lang LaSalle has projected the rental growth to be within the range of 2–5% this year. So far, the overall rent has increased 2.3%, as compared to the value in 4Q12. Because of the current anaemic economy, we would anticipate the rental growth to reach 3% at the year end.
 
Moreover, we have mentioned in our previous press releases this year that the new MRT service routes and the increasing Chinese tourists were projected to bring momentum to the office market. This quarter, we have seen nearly full occupancies in the joint-development office projects on the new and upcoming MRT routes. In addition, corporations such as Cathay United Group and Chailease Finance Co have started to convert several former office structures to hotels or have entered the hotel business. Some of these hotel projects are expected to be completed at the end of this year. In the long term, more building conversions to hotels are likely to occur because hotel operation poses higher returns than offices.”
 
Investment Market

  • Because of the uncertain economic prospect, most of the investors have remained observant. Moreover, the FSC has just granted the permission for insurers to purchase commercial properties in mid-September. Thus, the market had remained relatively quiet until the limits were alleviated. As soon as the permission was granted, a few insurance investors had made several significant deals, bringing the transaction volume up at the quarter end. The volume reached 21.5 billion—an increase of 35% q-o-q—but suffered a decrease of 61% y-o-y.
  •  With regard to the invested property types, the offices only accounted for 8% of the total transaction volume. Conversely, industrial offices remained as the most traded property type, occupying 46% of the total transactions. During the current economic slowdown, our market record shows that some businesses have sold their industrial properties to obtain funds for operations.
  • Policies in promoting tourism and in alleviating the limitations on Chinese tourists have brought momentum to Taiwan’s economy. Corporations have seen and started taking the advantages of such policy developments, and have gradually acquired retail or commercial buildings for hotel use. Additionally, this quarter, we have seen one Singaporean corporation acquired lands in the western part of Taipei. This deal has rewritten the land price record of Taipei because the unit price has reached NTD 11.5 million per ping.
  • Because the FSC has administered a minimum rental return of 2.875% on insurers acquiring commercial real estates, the insurers may divert their attention to other types of investment projects, such as leaseholds or public infrastructures. Several significant landmark deals will enter the market in 4Q13, which include the tendering of Elitegroup’s headquarters in Neihu and the leasehold projects on an A25 lot in Xinyi, as well as a public-owned land in the heart of Dunhua North district. With these developments, we expect insurers to return and to be active in the investment market in the near future.
 
Tony Chao (Managing Director) made the following comments:
 
“In general, the commercial office market in the second half of 2013 has been witnessing certain improvements at a moderate pace. With abundant capitals and favourable policies, the market is expected to return to a more dynamic sentiment. When the Economic Cooperation Framework Agreement (ECFA) framework gradually takes place and more cross-strait collaborations are realized, Taiwan’s economic and real estate development should consequently be enhanced.”
 
 
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