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Office Market 4 Q 2014

Research & Forecast Report Yangon Supply pipeline increases amid growth in demand

New office supply targeted for completion in 4Q 2014 slides as developers struggle to meet their deadlines. As a result, the additional stock in 2014 is slightly lower than 2013’s 31,000 sq m. Nevertheless, Yangon’s total office stock continued to expand, ending at 107,000 sq m of net useable space. Looking forward, the supply pipeline will remain robust with better-quality offices to come online within a span of four years. Colliers predicts the office market will yield an annual average increase of 70,000 sq m from 2015 to 2018.

Meanwhile, the occupancy rate continued to improve in 4Q 2014, albeit at a modest rate of 0.44% QoQ. On an annual basis, the demand was high, registering a 9% increase in net take-up from 2013’s 26,000 sq m. In 2015, the average occupancy rate is projected to temporarily decline following the completion of new sizeable projects. However, the rate is set towards an upward trajectory in the medium to long term once key investment sectors are liberalised further.

Project completion continues to slide as supply pipeline expands

“New projects were deferred as developers failed to meet their target completion date. As with the end of 2014, the total office supply in Yangon ended at 107,000 sq m of net useable space. The additional stock for the year reached 28,366 sq m, but this figure is much lower than the previous forecast of 60,000 sq m and is slightly lower than 2013’s new supply of 31,000 sq m. Out of the six new office developments set to be introduced in 4Q 2014, only Parkside One was launched as scheduled. This newly opened office building in Sanchaung Township offers some 5,500 sq m of leasable space – a development by Green Vision.

Meanwhile, the construction pipeline is building up amid prospects of increasing demand. In 2015, new supply is estimated to reach over 60,000 sq m, more than twice that of 2014. This translates to 12 new dedicated office buildings broadly distributed citywide. For instance, Union Financial Centre (Shwe Taung Development Co., Ltd.) and Strand Square (Flying Tiger) are set to open in Downtown; Vantage Tower and The Office @ Novotel Yangon Max (Max Myanmar) are expected to be launched in the next six months in Kamaryut Township, Inner City zone; and Uniteam Office Tower (Uni-team Marine) and Eastern Business Centre will reinforce the growing supply stock in the Outer City zone.

While the majority of new developments for 2015 are expected to be of improved quality, the sizes are relatively small, being under the 10,000 sq m range. However, sizeable projects are now under construction, with completion dates targeted in the medium to long term. These are Sule Square (Shan- gri-La Group), Kantharyar Office Tower (Asia Myanmar Shining Star), Time City Office Tower (Crown Advanced Construction Co., Ltd.), Pyay Office Tower (Noble Twin Dragon Pte Ltd.), Junction City Office Tower (Shwe Taung Development Co., Ltd., & Keppel Land), Golden City Office Tower (Golden Land Real Estate Development Co., Ltd. and Nature Link Co., Ltd.), HAGL Myanmar Centre Office Tower Phase 1 (Hoang Anh Gia Lai Myanmar Co. Ltd.), Crystal Tower (Shwe Taung Development Co., Ltd.) and Dagon City Office Bldgs. (Marga Global Investment Ltd.).

Colliers predicts that the office market will yield an annual average size of 70,000 sq m from 2015 to 2018, totalling some 25 new upcoming office buildings. The annual projections may vary as we look forward, with new mid-sized projects expected to launch in the near future. Meanwhile, sluggish construction activity was observed in some developments.

Classifying a premium grade office building

While many better-quality office options are now underway, there remains an absence of proper international Grade A buildings in Yangon. Although some upcoming office projects are perceived as premium in quality, a number fall short of internationally accepted specifications. Based on regional grading guidelines, Colliers has predetermined some key considerations in defining premium office buildings in Yangon. The quality of the development shall be examined for various technical aspects, such as the project’s location, the buildings size, the cost of the development, the floor plate and layout efficiency, the type of ownership, the general finishes (both interior and exterior), the rental and capital value levels, the building’s total efficiency, the floor-to-ceiling clearance, the property management, the type of equipment and the availability and quality of its facilities (fire system, building intelligence, backup power and redundancy system, airconditioner, elevator, and telecommunication) to name but a few.

At present, there is barely 38,000 sq m of toptier office space in Yangon. Besides the existing Sakura, Union Business Centre and Centerpoint, 14 new better-grade developments are now in the pipeline, representing over 300,000 sq m of new toptier supply. However, out of the total, only 30% has been preidentified as premium grade. This number will change once final development executions are fully examined.

Occupancy rates to be buoyant despite sizeable new supply

The citywide average occupancy rate slightly improved in 4Q 2014 to 88.9%, a rise of 0.4% QoQ. On an annual basis, the rate is up by 4.8%, translating to an occupied stock of over 95,000 sq m in 2014. The improvements in the occupancy were mainly driven by Downtown, whereas the Inner City zone witnessed a stable rate over the past two quarters. Demand in the Outer City zone remained the highest, being almost fully occupied for the whole of 2014.

The occupancy rate may head into a temporary decline towards the middle of 2015 amid the introduction of considerable new supply. However, the entry of foreign banks and securities companies will help buoy the take-up rate, which brings our baseline forecast to 89% over the next 12 months. However, the strengthening presence of international companies coupled with the continuous domestic expansion plans exert upward pressure to the overall take-up rate, potentially driving occupancy to over 90% by the end of 2015.

In the long run, demand drivers look to remain healthy. The administrative and management office requirements are set on an upward trajectory concurrent with the country’s road to industrialisation. The ASEAN integration will strengthen the in- flow of investments, eventually fuelling businesses and increasing office demand.

Moreover, the economy is currently witnessing an early stage of expansion, which will drive further growth in various investment sectors. However, the remaining barriers to entry for key industries such as banking and insurance will restrain demand until further liberalisation measures take place.

Average rent to increase at a rather modest pace

Note: Yangon’s historical office rental rates were revised and rebased as a result of a revamp in the sampling size conducted in 4Q 2014.

The citywide average office rental rate ended at USD 69.17 per sq m monthly in 4Q 2014, a slight increase from 3Q 2014’s USD 68.75. This translates to roughly USD13,750 per sq m monthly for a 200 sq m office unit.

The increase in rent was mainly recorded in the Inner City zone, which grew by 2% QoQ. Both average rents in Downtown and the Outer City zones remained stable over the past two quarters. Meanwhile, compared to the same period in 2013, the citywide average rental rate was up by 6%. The highest annual rental growth was seen in the Inner City zone at 23% YoY, followed by the Outer City zone at 9% YoY. In Downtown, the average rent has been stable since 4Q 2013 at USD82 per sq m monthly. The forecast direction for the citywide average rent remains upward in 2015, albeit at a more modest rate than witnessed in the past two years. We can assert the lack of international standard office buildings this year will keep premium rental rates relatively stable.