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§ Over the third quarter, the overall vacancy rate registered an upward shift to 16.27% due to the negative take-up recorded primarily in Xinyi and Non-Core. The vacancy rate in Xinyi increased to 20.66% from 19.70% in 2Q10, while vacancy in Non-Core increased to 15.15% from 13.16% in the second quarter.
§ After the financial crisis in 2008, a steady decrease in the effective rental rate was witnessed for eight consecutive quarters. We are of the opinion that the rental downward trend will continue in the next quarter, and it will subsequently ease after 1Q11.
§ There was a –406 take-up in 3Q10. One of the main reasons behind this setback was the relocation of larger occupants to their own properties. It was likely that these tenants preferred to move back to their own assets and maximise the use of their properties to save cost.
§ It is worth noting that the rent-free period went up for the third straight quarter, highlighting the positive outlook of landlords on the leasing market largely due to the improving cross-strait policy. Furthermore, landlords wanted to maintain their respective rental rates due to their anticipation of new demand, which led to an increase in the rent-free period as they adopted aggressive measures to attract tenants. Consequently, the effective rent declined, while the achievable rent rose.
§ In the third quarter, Xinyi district saw an increase in its vacancy rate by 0.96% and in its rental rate by 0.94%. The rise in vacancy rate was due to tenants opting to move back to their respective properties instead of leasing additional space. Meanwhile, the rental rate increase can be attributed to MNCs' preference for Xinyi district, especially now that more requests from Chinese tenants are anticipated.
§ The rental rate in Dunhua North increased 0.36% to NTD 2,216 per ping per month from NTD 2,208 per ping per month in 2Q10. The vacancy rate decreased to 13.93% from 16.80% in 2Q10. Majority of the occupied space in Taipei Financial Center, totalling 3,000 ping, were taken up by tenants for self-use. Meanwhile, Cathay Life has released its space during the quarter. Similarly, LongYen Life Service Corp. will also release its office levels of 1,500 ping purchased from Central Deposit Insurance Corporation.
§ The rental rates in Dunhua South decreased by 0.57% to NTD 2,364 per ping per month, and the vacancy rates declined by 0.62% as landlords tried to secure tenants. In addition, some tenants expanded their office space during the quarter.
§ The Non-Core CBD recorded the largest negative take-up due to the decentralisation trend. Consequently, rental rates decreased 0.73% to NTD 1,919 per ping per month from NTD 1,933 per ping per month in 2Q10, while the vacancy rate increased to 15.15% from 13.16% in the second quarter. Non-Core is expected to continue to feel the effects of decentralisation due to the competitiveness of the city fringe in terms of building age and location as well as accessibility to the MRT line. For example, a certain building in our basket will hit the 20% vacant space level from full occupation in the coming quarter.
Summary of the 3Q10 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
§ After the almost two-year breakout of the global financial crisis, the recovery of financial institutions has been notably faster than the other sectors. Consequently, the rental rate in Xinyi has been underpinned by financial institutions’ demand and expansion as the district continued to host the headquarters of over 20 international financial institutions. Many foreign banks have shown keen interest in the Xinyi development, an example of which is the office tower of ShinKong A12 Lot development securing pre-commitments from foreign banks even before receiving its occupancy permit.
§ More and more business centres are looking for high-end spaces in either Xinyi or other sub-markets. The owner believes that Taiwan will attract more companies to start businesses or set up branches, therefore the demand for these service offices will rise.
§ The Economic Cooperation Framework Agreement (ECFA) came into effect last 12 September 2010. Our record indicates that after the signing of the ECFA, Chinese occupiers in Taiwan had expanded their space requirements—from IT, transportation and petrochemical industries to the financial sector. When it comes to location, most Chinese occupiers preferred the landmark buildings in Xinyi, while occupiers from the airline industry preferred Dunhua North due to the cluster of airline businesses and location.
§ Moreover, the burgeoning development of retail outlets in Xinyi – such as Bella Vita, which opened last year, and the Uni-Hankyu department store, scheduled to open this October – is expected to attract more luxury companies to relocate to the district. For example, some luxury brands have relocated to Xinyi this quarter, and we anticipate more high-end brands to move to this sub-market in the future due to Xinyi's proximity.
§ Although the global economic recovery has slowed down in 2H10, Taiwan’s overall economy is forecasted to remain on solid footing due to a number of reasons. One, an improvement in the labour market has been witnessed, with the unemployment rate decreasing from 5.8% in 2009 to 5.3% in 2010. Two, interest rates remain low at 1.375%, which encourages investment. Three, the signing of the ECFA will benefit Taiwan’s exports. In fact, economic think tanks have recently hiked some of their 2010 growth estimates. For example, Global Insight (GI) raised its GDP growth estimate from 6.6% to 8.4%, while Economist Intelligence Unit (EIU) also increased its estimate from 7.7% to 9.2%. The GDP growth is expected to hit a historical high since 1990. Therefore, we can remain optimistic about the near-term prospects of the office market.
§ In 3Q10, NTD 20 billion worth of investment-grade properties changed hands. Notably, retail property transactions comprised 58% of the total amount, which is equal to NTD 11.75 billion. We can thus conclude that investors are confident in the outlook of the retail market due to the increasing number of Chinese tourists. As a consequence, retail properties gained more attention in the investment market than office developments.
§ Due to the sky-high prices of income-generating properties, some insurers are actively starting to acquire land and becoming developers.
§ According to our new research, the near doubling of global commercial real estate transactions in the first half of 2010 compared to the same period a year ago has been underpinned by cross-border investment returning to pre-crisis levels. The global commercial real estate investment totalled USD 132 billion for 1H10, compared to USD 76 billion in 1H09. In addition, full-year volumes will be between USD 275 billion and USD 300 billion for 2010, significantly ahead of the USD 209 billion total for 2009, as cross-border investors continue to be very active.
§ According to our record, as of 3Q10, the total transaction for 2010 has already reached NTD 67.9 billion, which already exceeds 2009's full-year total of NTD 65.6 billion. We anticipate that investment in the fourth quarter will remain strong due to the low interest rate and the improving relations between China and Taiwan.
Sherry Wu made the following comments:
The office tower of ShinKong Lot A12 development is slated to open by the end of this year. Although there are pre-commitments among the financial sector and luxury brands, actual physical movements have been scheduled for next year. As a consequence, the vacancy rate is estimated to increase by 4% to reach 24%.
However, the landlords are confident on the long term leasing market. Consequently, landlords prefer either short-term leasing contract or little rental correction.
As far as the investment market, rental increase has been limited while the vacancy rate remained high. The capital rate has risen due to the anticipation of price increases. This quarter, the prices for buildings and retail outs had hit historical highs, causing the cap rate to continue to go down below 2.8%.
In the long run, we are under the assumption that the increasing demand from Chinese and MNCs will grow in the future. As a consequence, the rental rate will go up with the demand for office space and the gross yield will recover to a reasonable level.
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