Savills Research July 2023: Asia Pacific Office Markets Spotlight
Savills Research examines why the Asia Pacific office market will continue to provide investor opportunity despite changing demand dynamics.
The office sector has long been a preferred investment asset in Asia Pacific thanks to reliable risk adjusted returns. However, the post-pandemic office environment is a very different one to that of 2019. On top of that, changing demographics and a rash of other structural factors are presenting additional challenges. That said, offices are not going anywhere, and with some effort to find value and mitigate risk, opportunities do exist. Among the factors giving rise to office sector opportunity:
The Knowledge Economy and Services
As emerging economies in APAC, chiefly India and Southeast Asian nations, move away from manufacturing to service-based economies, such as ‘business process outsourcing’ in the Philippines, and technology and knowledge-focused industries, the the demand for office space is poised to increase further, following a decade of growth. By attracting high value talent and multinationals, tech cities such as Bengaluru will see both demand and rents climb.
The Rise of Megacities and Changing Demographics
With the global population now topping eight billion, Gen Z representing the single largest age demographic in ASEAN nations and India and which is focused on well-being, ESG and flexibility, and increasing urbanisation from all quarters, demand from office based employment is set to rise. Megacities also mean better employment and education opportunities, improved health care access and more sustainable living. Currently, 19 of the world’s 33 megacities are in APAC. By 2050, that figure will rise to 25 of 47.
Hybrid Working and Office Employment
The hybrid working model gained traction during the COVID pandemic, but in many places its appeal has lingered in some form, with workers expressing a preference for a combination of office and home working. While that works in North America and Europe, residential reality in APAC has seen more workers return to the office much faster. Commute times, culture and communications infrastructure all play a part in how people work in APAC. However, the office-based employment market set to expand dramatically in Beijing, Shenzhen, Tokyo, Manila and Bengaluru through 2032. As such office demand should remain steady.
The Green Revolution and ESG Compliance
APAC has been slower to adopt ESG and green standards than other parts of the world. As Gen Z takes over the workforce and more and more corporates adopt ESG mandates, sustainable offices will become the norm. In order to meet net zero targets, governments will be compelled to tighten ESG and green regulations. Investors with non-compliant assets will find them stranded. Currently 95% of Singapore’s Grade A office stock is green certified. The rate is 64% in Kuala Lumpur and 50% in Hong Kong. With many regional markets boasting under-certified stock, opportunities do exist, as long as cap ex risk to bring assets up to standard is recognised. At present, the green rental premium sits at 5% to 10%, which may decrease in the future. The risk of stranded assets, however, will not change.
For complete details, read the Asia Pacific Office Markets Spotlight at Savills Research: http://sav.li/2w2
