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§ The overall vacancy rate climbed 2.7 percentage points to 16.5% as 14,818 ping (48,973 sqm) of unoccupied new supply was added to the Grade A office market through three completions.
§ Of the properties in our Grade A basket that are not owner-occupied, 43% registered a lift in their vacancy rate, indicating that the anemic demand is encompassing more than one business sector and has not been confined to less-desirable buildings.
§ Average rental rates slid a further 2.4% to NTD 2,425 per ping per month. The correction came on the back of declines of 4% and 1.7% in Xinyi and Dunhua South respectively. The non-Core CBD and Dunhua North sub-markets escaped the quarter unscathed with regard to rental contraction.
§ As expected, Xinyi and Dunhua South have been the office districts most adversely affected by the current downturn, as banking and finance occupiers reduce their space requirements. This situation has been exacerbated by the new supply that has recently come on-line in both areas.
§ Compared to a year ago – roughly the beginning of the financial crisis – Taipei’s Grade A office rents have retreated 6.4%. Although this is hardly good news, it is much better than what is taking place in mature markets.
§ The area exhibiting the largest rental fall to date has been Xinyi, where average rents have declined 8.4% y-o-y. Dunhua North has been the least-affected, where rents are down just 3% from the same period last year.
§ Dunhua North has also outperformed the other sub-markets at containing a rising vacancy rate through tenant retention. The district’s vacancy has climbed just 2 percentage point to 7.4% over the last year which compares favorably to the overall market which has soared to 16.5%. When observing the absolute vacancy figure for the sub-market, there is just 6,538 ping (21,613 sqm) of unoccupied space, which is the equivalent of 1–2 quarters of take-up under normal market conditions.
Summary of 2009 Q3 rent and vacancy values for the Grade A office market:
Gross Achievable Rent (Grade A) (NTD/ping/month)
Change from last Quarter
Average for Taipei
§ We are now seeing signs of market activity after three successive quarters with no discernable highlights aside from tenants returning space. We would add the caveat that new transactions are still far from plentiful and represent a small portion of what a healthy market would see. Accordingly, we are cautiously optimistic that the worst is behind us, though cognizant that it will still be some time before the market returns to growth.
§ Occupiers continue to return space across the entire Grade A office market, resulting in small pockets of vacancy scattered across numerous properties, rather than concentrated in a few. This should slow market recovery as small vacancies often prove difficult to fill compared to large contiguous space.
§ Those companies that have recently been involved in an M&A are consolidating operations, which usually results in the new entity surrendering some space. This trend is more pronounced for the banking and finance sector, given the size of the companies and numerous locations that they occupy both retail and office space.
§ Landlords continue to show flexibility in lease negotiations, particularly with existing tenants. In the past, landlords would typically offer a prospective tenant more attractive terms than an existing one, in a bid to attract new occupants. The prevailing thought was that priority should be placed on attracting occupiers as those who are already in the building are less-inclined to consider competing options. However, this situation has reversed itself and existing tenants are now receiving the most generous lease terms. This is a consequence of the shrinking pool of new lessees, as well as the landlords’ consciousness that there is a strong possibility of losing tenants.
§ Neihu continues to be a popular choice for occupiers, including those that have traditionally resided exclusively in Grade A space. The most recent migration saw LG, DHL and Diageo vacate the city-centre in favour of the technology park and its more affordable space.
§ A sizeable MNC bank has been returning space across the entire city having been hit hard by the financial crisis. This pattern may repeat itself depending on the health – and consolidation of the industry – of its peers.
§ Over 3Q09, NTD 22.25 billion (USD 680 million) worth of investment-grade property changed hands, with more than NTD 20 billion (USD 620 million) being added to domestic life insurers growing portfolios. Fubon Life was the most active of this group, splashing out a total NTD 14.3 billion (USD 437 million).
§ Foreign investors stayed on the sidelines for the fourth consecutive quarter, which is a likely consequence of the low investment yields and excess liquidity in Taiwan.
§ Retail has emerged as a popular choice for investment capital, which is not surprising given the burgeoning number of Mainland tourists visiting Taiwan and the correction the office market is still undergoing. Rising consumer sentiment and retail sales are also helping to underpin investor confidence in the sector.
§ The most high-profile transaction for 3Q09 saw Fubon Life acquire the 12,862-ping (42,509 sqm) Asia World Shopping Mall for NTD 10 billion (USD 306 million). The property is situated in Dunhua North, an area which has quickly become a hot-spot owing to its proximity to Songshan Airport, MRT extension and the under-construction Mandarin Oriental Hotel.
§ Neihu Technology Park saw three office buildings traded over 3Q09 and remains a top investment destination for life insurance companies in spite of the low returns and high vacancy the park has to offer.
§ Investors are likely to favor retail investments over office as the latter proves to be a laggard to the recovery of the overall economy. With retail assets, improving returns can be realized as quickly as tourist numbers rise or consumers feel more confident. Conversely, with the office market it is a more drawn out process, beginning with an improving economy. This is then followed by companies filling space that they had previous left vacant, but not surrendered. Once these steps have taken place – and businesses are feeling confident – only then will occupiers have the need for, and be ready to lease additional space.
Outlook for the Taipei office market:
§ It would now appear that landlords have resigned themselves to the fact that there will be limited fresh demand from Mainland occupiers. Despite this, there is a very real possibility that domestic investors will take the stance that Chinese capital is on its way, which may continue to underpin yield compression and capital value growth.
§ We maintain our forecast for the overall Grade A vacancy rate to reach 18%. We have now seen the entire 2009 supply come on line, meaning any rise in vacancy will come in the form of tenants returning space. However, it does appear that the correction of the market has decelerated in-line with the overall economy.
§ The Xinyi sub-market’s recovery will be sluggish at best. The area’s landlords are now reporting 49,380 ping (163,200 sqm) of vacant space, which is comparable to about 2 years of healthy absorption for the entire Grade A market.
§ Rental rates are proving to be more resilient than the overall vacancy rate although the 3Q09 retrenchment of 2.4% would seem to suggest that there are an increasing number of landlords who are aware that we will not see a significant uptick in the demand for space any time soon.
Sherry Wu made the following comments:
“Clearly the Taipei office market is not in the best of shape, nor is it reflecting what many had hoped would materialize once relations with China warmed. But I do see some promising signs of things to come, and the rate at which the market is deteriorating has clearly slowed. The TAIEX is up, residential prices are on the rise and the number of employees on forced unpaid leave is about one tenth of what it once was. All of these things are very promising and will flow through to the office market eventually.”
“Although Taipei’s rents have dropped about 6~7% from their peak, when looking at other markets we feel somewhat fortunate about this. Hong Kong, Tokyo and Singapore are all down more than 40% from their height in 2008.”
“The manner in which tenants meet there space requirements and dispose of their unwanted space is somewhat good. This is because some of the techniques that both landlords and tenants are using to stay alive can and will be used in the future.”
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