Asia-Pacific prime office markets: India leads Q2 2024 growth amid regional fluctuations

As we analyse the Q2 2024 insights, a compelling narrative of divergence emerges, with India's major metropolitan areas defying the downward pressure experienced by many of their regional counterparts.

While the Asia-Pacific Prime Office Rental Index registered a 3.1% year-on-year decline, India's key office markets have shown impressive momentum. The country's three largest office hubs - Bengaluru, Delhi-NCR, and Mumbai Metropolitan Region - collectively witnessed a substantial 50% surge in leasing volumes, reaching 10.5 million square feet in Q2 2024. Bengaluru, often called India's tech capital, continues to lead the charge, securing 4.9 million square feet of leased space in the second quarter. This demand is gradually tilting the market dynamics in favour of landlords, as evidenced by the growth in prime rents.

Mumbai's performance is equally noteworthy, with approximately three million square feet leased, marking a 183.1% year-on-year increase. The sustained growth in these key markets since late 2023 points to a more profound, more structural shift in India's office space dynamics. This trend is further reinforced by rising physical occupancy levels, driven in part by major technology firms such as TCS and HCL Technologies actively encouraging employees to return to office-based work.

As we delve deeper into the regional variations and underlying factors driving these trends, it becomes clear that the Asia-Pacific office market is far from homogeneous. The Indian market's outperformance, set against the backdrop of continued challenges in Chinese Mainland cities and mixed results in Australian markets, offers valuable insights into the evolving nature of office demand and the importance of local market dynamics in shaping real estate trends.

Here’s an overview of the region’s performance.

Australasia

Brisbane, Perth and Sydney recorded the three highest rental year-on-year growth at 8.1%, 7.1% and 5.1%, respectively. 

The broader Australian office landscape continues to evolve:

Sydney and Melbourne saw increased average incentives, primarily due to tenant downsizing driven by hybrid work schedules.
Despite no new supply in Q2, higher headline rents kept net effective rents on an upward trajectory in these markets.
Auckland's prime office rents grew over 2% year-on-year, but momentum is waning after three consecutive quarters of stagnation. The completion of nearly 200,000 sqm of new supply has lifted vacancy rates, putting pressure on the market.
Southeast Asia

The overall vacancy rate in Southeast Asia's emerging markets dipped to 24%, a 0.6 percentage point decrease quarter-on-quarter. This modest improvement suggests a gradual stabilisation in the region's office sector. However, Jakarta bucked this trend, with its vacancy rate climbing above 30%, highlighting the varied pace of recovery across different cities. Rental growth remained subdued across most markets. Manila experienced a decline in average rents, primarily due to downward adjustments in older prime projects outweighing gains elsewhere. Similarly, Singapore saw year-on-year growth slow for the fourth consecutive quarter, reflecting ongoing caution among occupiers. The tech sector and banking industry's continued space consolidation and reduction efforts have prompted landlords, particularly in Singapore, to adopt more flexible negotiation strategies to maintain occupancy levels. Amidst these challenges, Ho Chi Minh City emerged as a bright spot. The city's newly launched Grade A projects attracted significant interest from major international tenants, driven by a growing preference for high-quality, environmentally certified spaces. This trend suggests a potential divergence in market performance based on building quality and sustainability credentials.

East-Asia

Prime office markets in Chinese Mainland's first-tier cities experienced another challenging quarter, with rents declining more sharply than in the previous period. Year-on-year rents fell 10.8% in Q2 2024, steeper than the 10.0% drop observed in Q1. Simultaneously, vacancy rates climbed by 0.2 percentage points from Q1 to Q2 2024, surpassing 19%. This increase coincided with the delivery of over 700,000 square meters of new office space across Beijing, Guangzhou, Shanghai, and Shenzhen.

Despite these challenges, Beijing and Shanghai saw improved absorption rates as landlords prioritised occupancy over rental rates. This strategy led to increased leasing activity, particularly from state-owned enterprises in Beijing, which took up significant office spaces.

In Shanghai, companies capitalised on falling rents to relocate from business parks to prime office spaces, further boosting absorption. A similar trend is unfolding in Hong Kong SAR, where declining office rents are spurring recentralisation and flight-to-quality moves by occupiers.

This shift in tenant behavior is reshaping the market dynamics across these major cities. In contrast, Seoul, Taipei, and Tokyo have largely maintained firm market conditions. Sustained demand coupled with a low supply pipeline is expected to continue exerting upward pressure on rents in these markets, setting them apart from their Chinese Mainland counterparts.

The full report can be found here.