APAC Office Rent Growth Set to Moderate in 2023 Says Knight Frank

Economies driven by domestic consumption, such as emerging Southeast Asia and India are forecast to remain supportive of regional growth as the rest of Asia Pacific normalises next year, according to Knight Frank.

APAC is set to keep its crown as the world’s fastest-growing region despite ongoing stressors exacerbated by the Russia-Ukraine conflict and global financial volatility, the property services firm said in its Asia Pacific outlook for 2023.

In the agency’s rosiest scenario, fundamentals could surprise to the upside on the strength of lower-than-expected terminal interest rates and the easing of China’s zero-COVID strategy.

“As of late, Chinese authorities have lowered the duration of quarantine for inbound travellers, a step in the right direction that could set the tone for more calibration and an eventual exit in 2023-2024,” said Christine Li, head of research for Asia Pacific at Knight Frank. “We can afford to be sanguine given that nascent signs of inflation peaking have crept into the Fed’s data watch.”

Office Rent Growth to Ease

Knight Frank expects growth in regional office rents to moderate from 3 percent this year to 2 percent in 2023 as occupiers add flexibility to their portfolios to generate savings. The co-working footprint in central business districts is apt to expand in line with the increased preference for flexibility by space users.

Vacancies are seen rising from 14.6 percent currently to 16 percent as companies turn more cautious with expansion.

Among the region’s key cities, Indian tech hub Bengaluru is in line for the highest rent growth next year at 7 percent, while Seoul will have the tightest vacancy rate at 1.5 percent, Knight Frank said.

The report predicts that market conditions in 2023 will remain favourable to tenants as “highly amenitised” office buildings with sustainable credits are completed and made available for occupancy.

“The increasing integration of hybrid working as a new norm in workplace culture will continue to feed a flight-to-quality trend in the region’s office markets,” said Tim Armstrong, Knight Frank’s global head of occupier strategy and solutions. “Occupiers will continue to gravitate towards spaces that are best placed to bridge the gap between remote working, which are also well-amenitised to provide a strong return-to-office narrative.”

Investment Holding Pattern

Real estate transaction volume in Asia Pacific fell by 13.4 percent year-on-year in the first three quarters of 2022 as rising interest rates weighed on sentiment across the region, Knight Frank said.

The agency expects volatility to continue holding up transactions in the short term as investors seek price discovery in various markets, with activity picking up in the latter part of 2023 as the macroeconomic picture stabilises.

Knight Frank likes offices as an investment, especially in Singapore, due to a good base of all-cash buyers and lowly geared regional core funds keen to buy prime assets with inflation-hedging characteristics when pricing has adjusted. Also attractive are data centres, with tenant demand from cloud service providers in Australia, Japan and Southeast Asia driving global investors to fund developments in those markets.

“Investors will gravitate towards core, liquid assets in prime locations with attractive yields relative to the cost of debt as defensive options,” the report said.