Last Year's Office Market View From The Property Report

High rents prop up Bangkok office stock - June 2006

Four new offices, comprising 136,246 sqm were completed and ready for rent in the first quarter of 2006. Of this amount, 59,081 sqm was in Q House lumpini, 36,000 sqm in the Exchange Tower, 30,765 sqm in the Column Tower and 10,400 sqm in the serviced apartments at Central Pinklao that were converted to office use. The total office supply (both in CBD and Non-CBD) in Bangkok increased 1.9% quarter-on-quarter to 7,345,922 sq. from 7,209,676. The increase was due mainly to the opening of Q House Lumpini (LH Bank building), comprising approximately 60,000 sqm of office space.
There is approximately 357,897 sqm of office space scheduled to be completed between Q2 2006-2008.

The 1.9% increase in supply slightly exceeded the level of take up resulting in the overall vacancy rate rising to 13.9% from 13.3% in Q4 2005. Rents increased in both CBD and Non-CBD areas. The average rent of office space in both CBD and Non-CBD increased 15.1% on a year-on-year basis. The average achieved rents were 616 Baht per sqm per month for grade A buildings and 434 Baht per sqm per month for grade B buildings.

The increase was due principally to the increase of rents in the CBD; an increase of 19.8% year-on-year for grade A buildings and 18.0% for grade B buildings. The average grade A office rent in CBD was 704 Baht per sqm per month compared with 528 Baht per sqm per month for grade A office in the Non-CBD.

The rents are inclusive of maintenance charges and air conditioning expenses and are effective rents, i.e. they have been discounted to take account of rent-free periods which average between 1-2 months for 200-300 square meters transactions.

In the first quarter of 2006, net office building take-up was 73,981 sqm About 51% of office take up, 37,495 sqm, was in Bangkok’s CBD. While other 36,486 sqm was in secondary locations. Since 98%, 125,846 sqm, of new office supply was in Bangkok’s CBD, this has resulted the average office occupancy in Bangkok’ CBD dropping to 85.9% from 87.9% in the previous quarter. While, the average of office occupancy in Bangkok’s Non-CBD slightly increased to 85.8% from 85.7% in the previous quarter.

This year it is expected that the office supply will grow by 3.7% year-on-year, in response to the growing demand for office space. The Bangkok office supply has grown steadily at an average of 2.7% a year over the past 8 years. In addition, the office supply in the CBD at this year end will outgrow that in the Non-CBD; 4.36% year-on-year in the CBD as opposed to 3.01% year-on-year in the Non-CBD.

About 366,197 sqm of office space will be completed to the stock in Q2 2006-2008. Of this amount, a total of 147,300 sqm will be completed by the end of 2006 including Fenix Tower (25,000 sqm), Comlink I (20,000 sqm), Supalai Grand Tower (46,000 sqm), Rasa Tower II (20,000 sqm), The Trendy (28,000 sqm) and Pipatanasin Building (8,300 sqm). King Power’s new head office, Athenee Tower, Thai Beverage Building and Jaturas Jamjuree (previously known as C.U. Hi-Tech-Square) are scheduled to be completed in 2007. Two more buildings, namely Pakin Building and Asoke Complex, are expected to be completed in 2008. Of the future supply of 366,197 sqm, 66% will be the CBD area, while 34% will be the Non-CBD. When classified based on grade of the building, 53% of total future supply will be in grade A buildings, while the rest will be in grade B buildings.

Vacancy
The average vacancy rate of offices in Bangkok increased to 13.9% from 13.6% as new supply exceeded new demand in this quarter. The total amount of vacant office space was approximately 1.02 million sqm.

As of the first quarter of 2006, the total amount of vacant office space in Bangkok’s CBD increased to 515,790 sqm from 427,439 sqm in the previous quarter. While the total vacant space in the Non-CBD decreased to 501,789 sqm from 527,884 sqm, resulting in the average vacancy rates of office market in Bangkok’s CBD and Non-CBD at 14.1% and 13.6% respectively.

Although the total vacant office space increased in the first quarter, the whole year vacancy rate is expected to drop because the total amount of new demand is expected to exceed level of new supply. It is expected to continue to drop as well in 2007 because the total number of offices under construction is lower than expected demand.

Supply
The opening of the three office buildings in the CBD contributed most to the supply increase in Q1 2006. The opening of Q House Lumpini, the Column Tower and the Exchange Tower have increased the office space in the prime area by 125,846 sqm, pushing the total office supply in Bangkok CBD to 3.66 million sqm, while only 10,400 sqm (Central Place Pinklao) were added to the Non-CBD stock in Q1 2006. The total office space in the Non-CBD area thus remained slightly higher than that in the CBD area (3.66 million sqm in the CBD compared with 3.69 million sqm in the Non-CBD).

Demand
In the first quarter of 2006, net office building take-up was 73,981 sqm Consequently, the total office building take-up was at 6.3 million sqm, a 1.2% increased from the previous quarter. Although office demand remains strong, the average occupancy rate of Bangkok’s office market dropped to 86.1% from 86.7% recorded in the previous quarter. This is a result of the completion of new office buildings, totaling 136,246 sqm.

Rental
As office demand remained strong in the first quarter of 2006, office rents increased through out the CBD area and Non-CBD areas. The average rents of grade A and B offices rose by 3.5% and 1.4% respectively compared to the previous quarter. The average grade A office rent in the CBD was 704 Baht per sqm per month, a 3.8% increase from last quarter or a 19.8% increase from the same period last year. For the non-CBD area, the average grade A office rent was 528 Baht per sqm per month a 3.1% rose from the previous quarter.

For grade B offices, the average rent for the first quarter of 2006 was 473 baht per sqm for the CBD area and 383 Baht per sqm for Non-CBD areas, these numbers increased by 2.1% and 0.5% respectively. If compared against the rents of grade A office rents in 2005, rents in the CBD increased higher than Non-CBD locations because demand is stronger and most companies in the CBD area are willing to pay more. The rents are inclusive of maintenance charges and air conditioning expenses and are effective rents, i.e. they have been discounted to take account of rent-free periods which average between 1-2 months for 200-300 square meters transactions.

Prospects
The office market is expected to be healthy in 2006-2007. Although the local economy is slowing down, the office market is expected to remain strong as vacancy rates continue to drop and there is limited new supply coming to the market compared to historical demand. New supply is still not enough to absorb current demand. Increasing rents will attract more developers and companies to start construction both for rent or for their own use, even as construction and land costs are increasing.