October 31, 2020

office rentals in Asia to decline


People stand along Victoria Harbour in the Tsim Sha Tsui district as Bank of China Tower, center left, and other buildings on Hong Kong island stand in Hong Kong, China.

Justin Chin | Bloomberg | Getty Images

Working from home has become the norm during the coronavirus pandemic, and Morgan Stanley predicts that office tenants across Asia will permanently give up between 3% and 9% of their existing office space.

That will result in rent declining between 10% and 15% over the next three years, a recent report by the investment bank estimated.

Big tenants from the financial and IT industries, which have well established business continuity plans or work-from-home infrastructure, could give up even more office space — at 10% over the next three years, said the report.

Below is the projected rental impact from June 2020 to December 2022, according to the report which assessed the rental impact on key financial centers in Asia Pacific.

  • Singapore: -10% decline. Year-to-date actual decline: -3%
  • Tokyo: -9% decline. Year-to-date actual increase: +3%
  • Hong Kong: -7% decline. Year-to-date actual decline: -13%.
  • Sydney: -5%. Year-to-date actual decline: -2%
  • Top 7 metropolitan cities in India: +5% increase. Year-to-date actual decline: -2%.

Those estimates are based on the bank’s base case in which 40% of all employers, with IT infrastructure workers, returning between 10% and 15% of their space.

How companies will cope with less space

As companies cut their office space, Morgan Stanley predicted that they will do it through a combination of three strategies.

One option would embark on desk-sharing, where everyone works from home one day a week. That can save 20% of office space, the investment bank says.

“Across Asia, desk space per person has been declining for some time. We expect that to remain flat or grow if social distancing requirements are adhered to for longer. However, unless COVID-19 lingers for an extended period, we do not expect social distancing to drive office demand, as highlighted by many property consultants,” Morgan Stanley wrote.

Another strategy would identify some functions that can be permanently done from home, such as human resources or other back-office jobs. Companies could also look into relocating some roles to low-cost locations such as India or Vietnam, according to the report.

The investment bank predicted that if companies have any additional demand for office space, they would tap on flexible work spaces instead.

WeWork designed and  now operates a Standard Chartered office in Hong Kong

Uptin Saiidi | CNBC

“Demand for flexible workspace declined in 2H19 and 1H20, as the majority of workers stayed at home. However, as companies decide to shrink their existing permanent spaces, we expect them to rely even more heavily on flexible workspaces,” the bank wrote.

Increasingly, office landlords across Asia Pacific are also incorporating flexible space within their buildings, either through third-party operators or directly leasing out such spaces themselves, the report said.

Stock picks

If investors are nevertheless still looking to invest in office space, here are some of Morgan Stanley’s picks among regional real estate companies with high office exposure, and why the bank is overweight on these stocks.

  • HongKong Land Holdings: Earnings growth is supported by property sales in China, as well as China’s economic recovery
  • India’s DLF: Its businesses are diversified, including both offices and residential. Its plans to focus on middle-income housing should improve near-term cash flows.
  • Hong Kong’s Sun Hung Kai Properties: The stock’s currently at one of the cheapest valuations.



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