In the fourth quarter of 2009, the Asian office market continued to approach the bottom of the present cycle as rental declines slowed further and absorption gradually increased. The quarter saw multinationals and financial institutions in selected Asian cities display a renewed willingness to expand. The unemployment rate declined for three consecutive months in Taiwan and Hong Kong, whilst in Japan it fell from July 2009’s record high of 5.7 per cent to 5.1 per cent in December, reflecting the overall improvement in the Asian labour market.

Despite the positive news on the employment front, the recovery of demand in the

office sector remained lukewarm as many companies continued to adopt consolidation and decentralization strategies to reduce real estate related costs. The fourth quarter saw overall vacancy for Asian cities edge up 30bps quarter on quarter to 12.8 per cent, although Beijing, Hong Kong, Taipei, Bangalore and several Southeast Asian cities all recorded a minor decline in the amount of vacant space.

As the market outlook began to look more positive, landlords of prime buildings in leading Asian cities started to take a firmer stance towards maintaining present rental levels. Notwithstanding this fact, oversupply challenges continued to exert significant downward pressure on rentals in a number of emerging markets. Overall office rents in Asia fell 1.8 per cent in the fourth quarter, the decline decelerating from the 3.1 per cent recorded in the previous quarter. The current downward cycle has now lasted for about 18 months and certain markets with stronger economic fundamentals have already seen the slide in rentals come to an end.

The fourth quarter saw an increasing number of firms in Tokyo opt to relocate to cheaper space or areas outside the city core, a trend which resulted in a negative net absorption level for the review period. The slowdown in rental decline expected in the third quarter failed to materialise and little improvement was seen, although the reduction in rents began to stimulate tenant interest in certain selected buildings. The recovery of office demand has been slower than expected and concerns remain over a possible double dip recession in the Japanese economy.

In Singapore, tenants that had delayed decision-making relating to renewal or relocation options earlier in 2009 became increasingly active during the review period. The number of relocations increased although the focus of this activity still centred on finding cheaper alternatives or moving because of the redevelopment of existing premises. Selected tenants were looking for space to expand, with a number of large financial institutions ready to move forward with such plans. However, prime office rents fell for the fifth consecutive quarter in spite of the more positive outlook.

The Seoul office market remained relatively quiet within the review period, with only minimal Grade A leasing activity being seen in the fourth quarter of 2009. There had been a rise in optimism in the third quarter after several conglomerates and companies in the financial sector announced plans to increase their headcount, but the review period did not witness any major new or expansionary demand. Most leasing activity during the fourth quarter involved conglomerates consolidating their as well as those of their subsidiaries into self-owned properties to enhance business efficiency and save operating costs.

In China, foreign companies became more active in terms of expansion, notwithstanding the fact that domestic enterprises remained the major demand driver, and a number of major transactions were executed in both Beijing and Shanghai during the review period. Beijing saw increased take-up with total net absorption reaching a level similar to that recorded prior to the global economic downturn. The overhang of projects postponed during 2009 means that the Beijing prime office market is expected to see the completion of nine new projects in 2010 providing a total area of 7 million sqf. The Shanghai office market continued to witness signs of stabilisation with average rents recording their mildest dip yet since the onset of the financial crisis. Similarly, the decline in rents for prime office space in Guangzhou eased to 0.6 per cent quarter on quarter.

The signing of the much anticipated financial MOUs allowing Taiwanese and Chinese financial institutions to apply to establish branches on either side of the Taiwan Straits did not immediately translate into significant demand from mainland Chinese companies for office space in Taipei during the review period. As a consequence, the market remained generally stable although companies in the financial sector and healthcare industry were observed to continue to be actively planning for expansion. Grade A rentals are anticipated to bottom out in forthcoming quarters on the back of gradually improved take-up levels.

The Hong Kong Grade A office market was largely stable during the fourth quarter thanks to improved market sentiment and a more optimistic economic outlook. The

review period witnessed some landlords of prime new buildings in Central increase

their asking rents and adopt a stronger stance towards rental negotiations due to

the more robust demand for space.

Leasing activity in the major Indian office markets was fairly buoyant in the final

months of 2009. In New Delhi, rental values in the CBD remained largely

unchanged, with major companies increasingly drawn to the area following the

correction in rental values witnessed over the past few quarters. Mumbai saw a

number of fresh inquiries for medium and large sized units, while the Bangalore

office market remained quiet with a few isolated mid and small size leasing

transactions reported across the major business districts.

“The Asian office market displayed definite signs of recovery in the second half of

2009. With an increasing number of domestic and multinational companies

planning to expand in the months ahead, office leasing activity is expected to

increase in the first half of 2010, and this should move rentals up and away from

the lowest point in the downward cycle,” commented Andrew Ness, Executive

Director of CBRE Research Asia.