Bangkok Office Market Outlook Uncertain

[george]

Bangkok office market outlook uncertain

BANGKOK: -- A number of property firms have weighed in on Bangkok’s office market, with the majority forecasting unpredictability for the year ahead due to the country’s political uncertainties.

Suphin Mechuchep, Managing Director of Jones Lang LaSalle in Thailand, said that prospects for the market in 2007 have weakened to some degree, although the entire picture isn’t bleak.

“Market fundamentals indicate that rents are expected to continue to increase in 2007,” she said, but added that the pace of increase is likely to be lower than previous years, due to new supply coming on stream over the next 12-24 months. “If the situation of uncertainty is put to an end soon, rental growth will be even more likely.”

CB Richard Ellis Thailand, meanwhile, predicts that approximately 110,000 square metres of new buildings will be completed and a further 250,000 square metres are to be finished in 2008.

The only new grade A building to be completed in the CBD will be Athenee Tower on Wireless Road, which is scheduled to open by the middle of this year.

“Although take up was low in 2006 and rental growth was slower, the limited amount of supply means that tenants requiring premises of over 3,000 square metres have few choices. Our advice to large tenants is that they need to take action well before they require space because of the limited number of options,” said Nithipat Tongpun, director and head of office services at CBRE Thailand.

Looking back to 2006, the total take up of office space in Bangkok was 200,000 square metres, 33% less than in 2005. This was the lowest net take up since 1999, according to a report by CBRE.

At the end of 2006, the total office stock in Bangkok was 7.4 million square metres, indicating an increase of 200,000 square metres, compared to 2005. The overall vacancy rate was 13.5%, compared to 13.3% in 2005, while total take up was 200,000 square metres, compared to 300,000 square metres in 2005.

The vacancy rate for grade A offices in the Central Business District (CBD) was 8.3% and for grade B office in the CBD, the rate was 14%.

Rents for grade A CBD offices rose by 10% in 2006, compared to 23% in 2005, while grade B CBD rents rose by 15% in 2006, compared to 19% in 2005.

Although there was limited new supply in 2006, the lower level of new demand resulted in rentals growing at a slower rate.

Taking a similar stance to Jones Lang LaSalle, CBRE says it is hard to predict what demand will be in 2007; as the weakened demand in 2006 was due to a slower domestic economy. “Since demand for offices comes mainly from the service sector, growth in 2007 could be affected by the more restrictive regulations on foreign investment in services.”

If demand in 2007 totals 200,000 square metres or less, then rental growth is likely to be flat. However, if demand is more, rentals could increase sharply because the vacancy rate is low and new supply is limited.

Tenants whose leases are due to be renewed in 2007 will now have to expect to pay substantially higher rents, says CBRE. Over the last three years, grade A CBD rents have increased by 56% and tenants will have to pay the market rate on renewal.

The difference between grade A rents and grade B rents in the CBD is on average 200 baht per square metre. Fit out costs are around 15,000 baht per square metre and so there are only limited savings if tenants relocate from grade A to grade B space because, in Bangkok, the capital cost of fit out continues to form a high percentage of the rental compared to other countries. “Tenants are only likely to relocate if they need to expand or contract or if the capital cost of the fit out has been fully depreciated,” says CBRE.

Colliers International, meanwhile, predicts that areas outside Bangkok’s CBD will witness growth in 2007.

“Despite the impact attributed to the political impasse and volatile oil prices, the overall demand for offices continued to grow in 4Q 2006. Demand in the fringe locations remained strong due to the positive spill-over from the CBD where supply has been limited,” noted Colliers. “In anticipation of sustained economic growth and a limited supply situation over the next two to three years, prime office rents are expected to grow 23% to 880 Baht per sq m per month over the next 12 months.”

Knight Frank Thailand puts a positive spin on the year ahead as well, saying rental rates have now reached levels where forecasted yields are at sufficiently high levels to attract commercial developers back into the market. “Over the last year there has also been increased investment activity, with several significant properties changing hands, and work even resuming on several commercial projects that have been left incomplete following the last crisis,” said Marcus Burtenshaw, head of Knight Frank Thailand’s agency department.

Knight Frank research also indicates that whilst the pace of quarter on quarter rental growth in the Grade A sector has been slowing down recently, grade A rents are expected to continue to enjoy growth throughout 2007.

“This, together with projected levels of demand (estimated to be in the region of 200-250,000 sq m) stemming from the Finance, I.T. and Communication sectors, should lead to continued rental appreciation throughout all grades of building in the coming year,” said Burtenshaw.

Compared to other markets, Bangkok remains the fifth cheapest city in the Asia Pacific region to rent office space, with only Manila, Jakarta, Adelaide and Christchurch commanding lower office rents, says CBRE.

According to the CBRE’s Global Office Rent survey, rents in Hong Kong rose by 50% in 2006, with grade A rents at Bt2,500 per square metre and some transactions were recorded at Bt6,800 per square metre per month.

Singapore rents also rose by 50% in 2006, with average grade A rents now at Bt2,500 per square metre and some transactions were recorded at Bt3,440 per square metre.

--property-report.com 2007-02-16