OCCUPANCY RATE INCHED UP HOWEVER SLACK IN NET DEMAND

Transcription

1 Paul Ryan Cuevas Analyst Research & Advisory Myanmar +95 (0) paulryan.cuevas@colliers.com OCCUPANCY RATE INCHED UP HOWEVER SLACK IN NET DEMAND Summary & Recommendations Given the absence of new project completions, the citywide occupancy rate further inched up as at the end of Q Meanwhile, the net absorption rate at the end of the quarter is only half the amount recorded from the same period last year. Looking ahead, we expect office demand to increase steadily especially in the next twelve months with potentially better macroeconomic conditions. This could begin with the liberalisation of the insurance sector as well as the easing of restrictions in other major industries. Colliers encourages developers to focus more on improving building designs while also being cautious with their development cost to provide products that suit ongoing and future market requirements. DEMAND SUPPLY OCCUPANCY RENT > Demand remained healthy, yet has slowed down from the same period last year. Quicker economic reforms and further market liberalisation should boost growth moving forward. > No new completions were observed as of Q Looking ahead, a total of 225,800 sq m ( 2,430,491 sq ft) of leasable space is planned to be unveiled in the next three years. > The citywide occupancy rate further rose by 3% QOQ. The rate should rise further once the government allows new waves of foreign businesses to operate in the country. > The average rental rate stabilised at USD42.10 per sq m per month. Colliers expects the rental rate to remain stable in the next six months. Q End Q3/QOQ 2.9pp 69.5% 67.4% Note: The figures for rent represent USD per sq m per month. 1 sq m = sq ft. pp refers to percentage point. Full Year 2018 End 2018/YOY 0.7pp 2% 3.5% USD 42.1 USD Annual Average 11, 320 sq m 30,000 sq m 60,000 sq m 0 sq m 387,900 sq m 613,650 sq m End 2022/ Annual Average Growth pp 72% 2.1% USD 38.6

2 Area (sq m) 2 ABSENCE OF NEW SUPPLY IN Q3 Yangon s office market has gone through a period of adjustment since 2013, following the country s opening to the global economy. After an over long period of isolation, an initial burst of interest from various global companies, governments and non-governmental organisations led to a rise in office demand. Since then, the construction boom triggered by the improving optimism surrounding the country's democratisation and the continuing relaxation of rules relating to foreign investment has caused a surge of office development across the city (see Figure 1). However, given the ongoing market development, office requirements have decelerated as investors continue to adopt a wait and see approach as the government further eases market restrictions along with the liberealisation of key business sectors. While the scheduled future supply remains sizeable, construction delays are noticeable. In fact, at the end of Q3 2018, a dearth of new office completions was witnessed. Several developments scheduled to open this quarter were pushed to a later date while developers struggle to meet their target deadlines. As a result, the office pipeline for the remainder of 2018 declined substantially. This led us to revise our new supply forecast for the year to approximately 387,900 sq m (4,173,804 sq ft), a downward adjustment from 15.5% to 1.8% and 23.6% to 9%, on a quarterly and annual basis, respectively. Therefore, Naing Group s KBZ Tower is the only development anticipated to be completed by the end of Q In retrospect, from 1994 to 2017, the total office supply grew at a compounded annual growth rate of 9%. However, given that the pipeline continues to increase, Colliers estimates that Yangon will witness further progress in commercial building development, leading aggregate supply to escalate at an annual growth of 10.5% in the next three years. We expect eight projects to be completed within , translating to more than 225,800 sq m ( 2,430,491 sq ft) of leasable space. In terms of location, Colliers thinks that the stock will likely be concentrated in the Inner City Zone especially in the townships of Yankin and Bahan; while Downtown will likely witness only a considerable increase upon completion of the mixed-use development Yoma Central in New supply should be limited in 2019 but is scheduled to increase by more than 70,000 sq m (753,000 sq ft) in Figure 1: Yangon Office Supply Stock (Gross Leasable Area - sqm) 700, , , , , , ,000 - Supply at the start of the year Figure 2: Existing Office Supply Stock by Location (Gross Leasable Area - sqm) 54% Additional supply during the year 34% 12% Inner City Area Downtown Area Outer City Area

3 FUNCTIONALITY AS A KEY FACTOR AMONG TENANTS Figure 3: Sule Shangri-la Office Tower & Shopping Mall Alongside the increasing stock in recent years, Colliers has witnessed the growing demand for higher quality office spaces. As a result, notable upgrades in building designs across the city have been observed, with modern projects like Sule Square and Junction City being good examples. The incorporation of curtain wall systems, high floor-to-ceiling heights, expansive lobbies, as well as tenant-friendly floor plates and increased building efficiency are becoming more evident. Although occupancy cost, location and quality remain major considerations for tenants, Colliers saw that in some cases, tenants are now increasingly taking other factors into account, especially the overall functionality of the development. Staff accessibility, security and safety standards, as well as building energy-saving features have increased in importance. For example, one of the key strategies for efficient building envelopes is the integration of design and window strategies to allow more natural lighting, as well as minimising heat and glare. Another is the use of alternative energy such as the solar power system adopted by Junction city (see Figure 3). In the same way, developers may want to consider incorporating new technologies in their design plans (e.g. Building Management Systems to control and monitor all mechanical and electrical systems and processes in buildings) which adds value to the overall building offering. Early adoption and investment in newer technology may likewise help developers to attract and retain major occupiers as well as attain long term market leadership. Rental rates should likewise be positioned based on the prominence of the developers offerings. For older projects, it is worthwhile to embark on renovations, conversion to alternative uses, or redevelopment to avoid further downhill adjustments in rental levels. Otherwise, landlords should consider reclassifying their products and adjust their rents accordingly. Source: Sule Shangri-la Official Website ( 3

4 Figure 4: Junction City Office Tower Marble tiles and glass lobby Curtain wall façade Green energy efficiency with rooftop solar panels 4

5 Area (sq m) SLIGHT IMPROVEMENT IN OCCUPANCY RECORDED As of Q3 2018, the total occupied office stock breached the 300,000 sq m ( 3,236,923 sq ft) mark, an expansion of 21% from the same period last year. The occupancy rate improved modestly, being almost 3% higher than the previous quarter, representing an increase in the occupied stock of close to 13,056 sq m ( 140,534 sq ft). In fact, a few developments have reached full occupancy this quarter. Double-digit QOQ improvements in take-up rates were similarly recorded for several developments located in the Inner City Area. While the abovementioned figures remain healthy, Colliers notes that the pace of absorption has slowed down. At the end of Q3 2017, the net take-up ended at close to 60,000 sq m ( 645,835 sq ft). However, as of Q3 2018, the take-up only reached only almost half that. While demand appears currently held back given the recent market situation, Colliers still sees a lengthy upcycle in the office sector in the long term. Colliers expects the occupancy rate will probably improve further once the government allows new waves of foreign businesses to operate in the country. This especially entails implementation of investment-related reforms and further liberalisation of various sectors such as the insurance and the banking sectors, among others. Along with the existing business expansions and the eventual easing of restrictions in various sectors, the office market should witness increasingly robust demand in 2019 onwards. Meanwhile, we have seen a pronounced downward correction of lease rates over the past four years. Now that rents are settling at a more competitive level, we are seeing a flight to quality among tenants. As of Q3 2018, the average rental rate stabilised at USD42.10 per sq m per month. The rate is lower by 2% and 7%, on quarterly and annual bases, respectively. In fact, developments unveiled in recent years have begun offering more competitive asking rents, ranging from as low as USD20 per sq m per month for the lower-grade buildings to as high as USD58 per sq m per month for the higher-quality projects. In terms of location, Downtown Yangon still commands the highest lease rates followed by the Inner City and Outer City. Figure 5: Yangon Office Net Take-up and Citywide Occupancy Rate 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Table 1: Yangon Citywide Lease Rate (USD/sq m/month) CITYWIDE Q Q Q Q Q QOQ CHANGE Q3 2019F YOY CHANGE USD/ SQ M / % % MONTH Colliers foresees the rental rates to further stabilise and remain competitive in the next twelve months, especially as more supply comes online. As such, we advise future developments to be more discerning with their construction cost and cautious with their rental projections. Q New Supply Net Take-up Occupancy Rate Q Q Q % 70% 60% 50% 40% 30% 20% 10% 0% 5

6 Primary Author: Paul Ryan Cuevas Analyst Research & Advisory Myanmar +95 (0) Paulryan.cuevas@colliers.com Contributors: Ye Htun Thet Paing Senior Researcher Research & Advisory Myanmar +95 (0) William.Linn@colliers.com Shwe Yi Researcher Research & Advisory Myanmar +95 (0) For further information, please contact: Karlo Pobre Deputy Managing Director Myanmar +95 (0) Karlo.pobre@colliers.com Paul Ahlgrim Associate Director Leasing and Brokerage Myanmar +95 (0) Paul.ahlgrim@colliers.com The Htet Oo Manager Research & Advisory Myanmar +95 (0) Thehtet.oo@colliers.com ABOUT COLLIERS INTERNATIONAL GROUP INC. Colliers International Group Inc. (NASDAQ: CIGI) (TSX: CIGI) is a top tier global real estate services and investment management company operating in 69 countries with a workforce of more than 12,000 professionals. Colliers is the fastest-growing publicly listed global real estate services and investment management company, with 2017 corporate revenues of $2.3 billion ($2.7 billion including affiliates). With an enterprising culture and significant employee ownership and control, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide, and through its investment management services platform, has more than $20 billion of assets under management from the world s most respected institutional real estate investors. Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice to accelerate the success of its clients. Colliers has been ranked among the top 100 global outsourcing firms by the International Association of Outsourcing Professionals for 13 consecutive years, more than any other real estate services firm. Colliers is ranked the number one property manager in the world by Commercial Property Executive for two years in a row. Colliers is led by an experienced leadership team with significant equity ownership and a proven record of delivering more than 20% annualized returns for shareholders, over more than 20 years. For the latest news from Colliers, visit our website or follow us on COPYRIGHT 2018 COLLIERS INTERNATIONAL The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.