Knight Frank Thailand Releases Bangkok Office Market Overview Q4 2019

Pathumwan Junction on New Year's Day Bangkok Thailand

Mr. Marcus Burtenshaw, Executive Director and Head of Occupier Services and Commercial Agency (OSCA), Knight Frank Thailand, said, “As 2019 came to an end, we can look back upon a decade of growth in Bangkok’s office market. Over the past ten years, demand outstripped supply by over 100,000 square meters, and prime rents soared by more than 50% to rival those seen in markets like Chicago, Madrid and Melbourne.

Companies have changed in this time too. Today, they care more about their people, and this has influenced their preferences for office space. The office is no longer just viewed as a costly necessity, but increasingly, as a strategic device which can be invested in to retain and entice new talent. This is borne out by the statistics. Over the past decade, occupancy rates fell in the Grade C sector, whilst climbing throughout the rest of the market. This is especially prominent in the Grade A sector, which saw occupancies rise from 84% to almost 94%, despite soaring rents.

However, that growth has begun to show signs of slowing down. As 2020 begins, the new decade has been greeted with face masks and temperature screening. The outbreak of Covid-19 is a black swan event that will undoubtedly leave its mark on the charts of the global markets for future economists to study, but for occupiers today, it poses significant challenges.

In areas that are more severely affected by the disease, remote work policies are helping occupiers get back to work without having to visit their office. However, for some, this is posing a problem. Not only can home distractions lead to a decline in personal productivity, but the challenges of managing distributed teams are also magnified by the inefficiencies of systems that are used in lieu of face-to-face contact. If firms are able to solve these issues, it may change corporate attitudes toward remote working. Nevertheless, it will not replace the trust, engagement and accountability derived from working alongside colleagues.

We anticipate that the economic disruption and the uncertainties associated with the outbreak could dampen demand for office space in the short term, but as medical outreach and responses are expected to improve, it should not have any significant long term impact on demand for office space.”

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Office Property Market Indicators

Economic Overview

Based on Knight Frank Thailand Research, The Thai economy ended the year at a subdued level. The Bank of Thailand lowered its 2019 GDP growth forecast further from 2.8% to 2.5%. In comparison, GDP grew by 4.1% in 2018. The Bank forecasts headline inflation at 0.8%, below its 1% to 3% target range.

The benchmark rate was cut twice throughout the year to a record low of 1.25% in order to spur the slowing economy. However, the baht reached 29.91 per US dollar at year-end, its highest level in six years. The exceptionally strong baht has had a significantly negative impact on the exports and tourism sectors, both of which are key economic drivers. Exports are now estimated to decline 3.3% this year, far below the 6.7% growth achieved in the previous year.  Nevertheless, there are some positive signals for a stronger economy in 2020. Tourism levels began to rebound in the 2nd half of 2019, and are anticipated to continue rising. Meanwhile, government spending may accelerate with the confirmation of the fiscal 2020 budget bill in the upcoming months. Public investments are projected to rise by 6.3% compared to the 1.7% recorded in 2019.

Supply

In Q4 2019, the total supply of office space in Bangkok increased by 52,085 sq m to a total of 5,124,415 sq m. Total supply has increased by 1.0% Q-o-Q and 2.2% Y-o-Y. This marked the largest increase in the quarterly supply since Q1 2017. One building was added to the CBD, increasing total supply by 27,555 sq m. Another completion added 24,830 sq m outside the CBD. There were no withdrawals of obsolete stock in this quarter. Over the past five years, supply has been increasing at a rate of 23,353 sq m quarterly.

For the full year, total supply increased by 108,175 sq m, rebounding significantly from the previous year, during which supply grew by a meagre 17,432 sq m. Although 154,443 sq m were added in 2018, almost an equal amount of stock was withdrawn, resulting in minimal change overall. In comparison, the market added 125,175 sq m and only withdrew 17,000 sq m in 2019. This year’s supply growth is slightly higher than the average annual growth rate of 93,411 sq m over the past five years.

Figure 1

Bangkok Office Supply (Sq m)

Figure 2

Bangkok Office Annual Net Supply Change (Sq m)

Future Supply

In 2020, 10 new projects are expected to be completed, adding 210,868 sq m of office space to the market. Six of the new buildings will be located in the CBD. From 2020 to 2023, the Bangkok office market is projected to grow by 1,236,069 sq m or an average of 309,017 sq m annually (accounting for only additions and not withdrawals). In comparison, from 2015 to 2019, new supply entered the market at a rate of 138,911 sq m annually. From around 5.1 million sq m today, total office market supply will likely exceed 6.3 million sq m by 2023. This is over a 20% increase in size.

Table 1

Bangkok Office Future Supply (Sq m)

A greater volume of stock withdrawals due to the new property tax amendment commencing in 2020 may occur. This will gradually offset some of the new supply over time. For commercial properties, the amendment will introduce a marginal tax rate from 0.3% to a maximum of 1.2% on government appraised value. It will replace the current household and land tax which charges 12.5% on annual rental value. The new tax will place a heavier burden on low grade or poorly performing properties that are located in prime areas. It may incentivize the landlords of such properties to make capital improvements to their buildings.

Table 2

Bangkok Office Future Supply (Projects)

Demand

Leasing activity in Q4 2019 increased. Take up grew to 71,115 sq m from 56,504 sq m in the previous quarter. This represents a 3% quarterly growth rate, which puts the take up level above the 10 year quarterly average of 65,478 sq m for the first time in 2019. For the entire year, take up was at 222,372 sq m, falling for the second consecutive year from the peak level in 2017. This is slightly below the 10 year annual average at 261,912 sq m.

Figure 3

Bangkok Office Annual Take Up (Sq m)

For this quarter, take up of new and refurbished space only accounted for 19% of the total, representing a 17% decline Q-o-Q. Full-year numbers also reflect a decline in take up of new and refurbished supply as a percentage of total take up, declining to 22% from 37% in 2018. Over the past five years, tenants have shown an increasing preference for higher quality buildings that offer a better experience. Newer and refurbished buildings tend to meet these criteria and often attract higher demand than older buildings can. During this period, higher take up levels also coincided with the increase in take up of new and refurbished space. It indicates that preference for such properties has become a driving factor for leasing activity. On average, 33% of take up from 2015 onwards can be attributed to new and refurbished spaces, a contrast to a 13% share during 2010 to 2014. The decline in economic conditions this year may have caused some current and potential tenants to act more conservatively on office relocation or expansion plans, resulting in a lower take up proportion for new and refurbished buildings and the overall level of take up.

Figure 4

Bangkok Office Annual New and Refurbished Supply Take Up As % of Annual Take Up (Sq m)

Nevertheless, net absorption increased to 33,470 sq m from 27,324 sq m in Q3 2019. The result is a growth in total occupied space to 4,661,614 sq m, representing a 0.7% Q-o-Q and 1.2% Y-o-Y increase. For the full year, positive net absorption increased total occupied space by 55,472 sq m, rebounding from -13,736 sq m in 2018. As previously established, preference for new supply has become a driver for demand. This is also reflected by the strong correlation between net absorption and net supply change. It could explain this year’s rebounding net absorption level as it coincides with an increase in total supply.

From 2012 to 2016, net absorption exceeded net supply change, with a narrowing spread over time. In 2017, the opposite was observed, and this trend persisted in 2019. In other words, an increase in total supply corresponds to an increase in total occupied space by a lesser amount. This suggests that although annual demand is positive, it is lower than supply in this year.

Figure 5

Bangkok Office Quarterly Supply – Demand Dynamics (Sq m)

Figure 6

Bangkok Office Annual Supply – Demand Dynamics (Sq m)

The market occupancy rate dropped marginally to 91.0% from 91.2% in the previous quarter. The occupancy rate has declined by 0.2% Q-o-Q and 0.8% Y-o-Y. Despite the recent pattern of decline, the current market rate is still above the 10 year average of 89.9%. The occupancy rate increased by 0.6% to 93.6% in this quarter for grade A buildings. It held constant at 93.0% for grade B and declined by 1.6% for grade C. The current occupancy rate for grades A and B are considerably above their 10 year averages at 90.9% and 91.2%, respectively. For grade C however, the 85.9% occupancy rate is below the average of 87.4% during this period. For full year results, occupancies declined across the board, but did so unevenly. It decreased the least for grade B, falling by just 0.1% Y-o-Y. This is followed by a 1.1% decline for grade A and 2.0% for grade C.

Occupancy rates in the CBD did not change significantly this quarter. The strongest increase was 0.6% Q-o-Q for office space along Wireless Road, while the biggest drop was 0.1% Q-o-Q for Asoke – Phrompong. On an annual basis, occupancies increased for Wireless and Asoke – Phrompong, but declined for Ploenchit – Chidlom and Silom – Sathorn. Non-CBD areas had softer market conditions than those in the CBD. Although occupancies increased by 0.2% Q-o-Q for Rama 9 – Ratchadaphisek and 0.1% Q-o-Q for Bangna, all areas are down on an annual basis.

Figure 7

Bangkok Office Suuply, Demand and Occupancy Rate (Sq m)

Table 3

Bangkok Office Occupancy Rate by Grade

Rental Rates

The average asking rent increased by just 1 baht to 788 baht per sq.m. per month in Q4 2019. Over the past decade, average rent has been increasing by 3.9% annually. On a 5-year basis, rent increased by 4.7% annually, which is indicative of the recent period of growth in the office market. For this year, average rent only increased by 2.3% Y-o-Y.

When segmented by grade, only rent for grade A buildings increased in this quarter, rising to 1,135 baht from 1,129 baht in Q3 2019. Average asking rent declined to 811 baht from 813 baht for grade B, and to 489 baht from 493 baht for grade C. On an annual basis, grade A asking rent increased by 1.1% Y-o-Y, grade B increased by 0.9% and grade C declined by 1.0%. Grade C buildings have performed relatively poorly in comparison to other grades when considering the three consecutive quarters of rental decline and a 2.0% Y-o-Y reduction in occupancy rate.

Figure 8

Bangkok Office Average Asking Rent by Grade ( Baht Per Sq m Per Month )

Table 4

Bangkok Office Asking Rent by Grade

Rent by Areas

In the CBD, all areas experienced some quarterly rental growth except for Ploenchit – Chidlom. The area’s average asking rent declined by 1.6% from Q3 2019. All areas are up Y-o-Y, led by Wireless and Silom – Sathorn at 6.3% and 5.8%, respectively. Non-CBD areas displayed mixed results. Only Rama 9 – Ratchadaphisek experienced quarterly and yearly rental growth, increasing by 0.8% Q-o-Q and 4.9%   Y-o-Y. Foreign investors and tenants, especially from China, have shown significant interest in the area. This is due to the abundance of retail amenities, restaurants and the Chinese Embassy located here. The increase in new commercial and residential developments has greatly transformed the district over the past few years.

Table 5

Bangkok Office Sub-Market Indicators

Outlook

We reiterate our stance that although there is still room for growth, the market appears to be approaching the end of an expansionary period. The current year’s performance and recent trend suggest that the present demand level is weaker. When faced with uncertain economic conditions, tenants may act more conservatively, selecting to remain in the same office space, despite the growing preference for higher quality workspaces. If the supply pipeline from 2020 to 2023 goes ahead as planned, supply will grow at an unprecedented rate. However, if demand weakens further, we may see some project handovers delayed as developers anticipate stronger demand levels in later years. Both the new property tax law to be implemented in 2020 and the relatively poor grade C performance could incentivize landlords of such properties to withdraw and refurbish stock. This will add a positive dampening effect to the future supply growth, allowing demand to keep pace. The weakness in rental growth is expected to persist for the time being. As more high quality workspaces enter the market, landlords may have to compete on both rent and non-monetary incentives to secure tenants.

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