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Colliers Property Report – Yangon Office Q1 2019

Economic Reforms: A Game Changer

Summary & Recommendations

Myanmar’s macroeconomic performance has continued to experience gains in recent years. Major part of this big leap from 2011 is the easement of sanctions for various key industries. Such liberalisation resulted to a burst of interest from numerous companies and institutions. This has contributed to the upward course of office demand since then. At present, both citywide occupancy and net take up levels continue to rise. With the immense interest of the government in further liberalising more sectors, we can expect office space requirements to rise in 2019 onwards as more investors set a foothold into the country. In the meantime, Colliers continues to advise developers to introduce more international standard projects at reasonable rental rates.

DEMAND

As the government rolls out more policies directed towards the easement of more fundamental sectors, we expect demand for quality office spaces to grow stronger in 2019 and onwards.

SUPPLY

Supply was unchanged as of Q1 2019. A debut of eight new projects between 2019 and 2021 is anticipated, translating to more than 225,700 sq m (2.4 million sq ft) of additional leasable space.

OCCUPANCY

The citywide occupancy rate continued to rise, breaching the 70% mark. The rate is predicted to improve in 2019 but is likely to head downwards in H1 2020 given sizeable new stock.

RENT

Rental rates are likely to correct further downward given the sizeable future supply. A competitive rental environment will continually fuel demand at least in the near term.

LIMITED SUPPLY STOCK IN 2019

As of Q1 2019, Yangon office stock was unchanged QOQ at more than 387,900 sq meters (4.2 million sq feet) of leasable space (see Figure 1). The number is, however, up by 9% on an annual basis. This leaves KBZ Tower (formerly called Red Hill Tower) in Sanchaung Township the most recent office development introduced. Given the prevailing concern regarding the slow-moving construction activity across the city, limited entry of new supply is likely in H2 2019. In fact, the projected additional supply for the year are all scheduled for unveiling in Q2 2019. Mindama Office Center (China Company Ltd.) in Mayangone Township, Maha Nawarat Office Tower (Maha Nawarat Myay Co.Ltd.) in Botahtaung Township, and Time City Office Towers (Crown Advanced Construction Co., Ltd.) in Kamaryut Township are those expected to come online, collectively providing more than 54,560 sq meters (587,270 sq feet) of additional leasable space for the whole year.

Figure 1: Yangon office stock (sq meters of gross leasable area)

Source: Colliers International

During this period, it would be favourable for developers and landlords to refurbish older projects in order to compete successfully with newer developments and to avoid further descending tunings in lease rates. This, on the back of the heightening number of foreign companies entering Myanmar along with the strong local expansion plans ,should prompt these key players to continually be strategic with their plans.
During this period, it would be favourable for developers and landlords to refurbish older projects in order to compete successfully with newer developments and to avoid further descending tunings in lease rates. This, on the back of the heightening number of foreign companies entering Myanmar along with the strong local expansion plans ,should prompt these key players to continually be strategic with their plans.
Overall, our outlook remains the same from the previous quarter. Colliers anticipate the completion of eight developments between 2019 and 2021, translating to more than 225,700 sq meters (2.4 million sq feet) of additional leasable space. In terms of location, we see that the stock will still be concentrated in the Inner City Zone (See Figure 2); while Downtown will only witness a sizeable increase upon the introduction of Yoma Central in 2021.

Figure 2: Office supply stock by location – 2019 (sq meters of gross leasable area)

Source: Colliers International

Looking ahead, Yangon is forecasted to witness further improvements in commercial building development. Likewise, developers are expected to continue banking on the long-term demand prospects especially with the new policies and legislations eventually coming to fruition. Generally, while major progress has been made, Colliers believes that much remains to be done in this area, with 2019 likely to see more investiture of economic reforms and legal exertions. Nonetheless, these initiatives set a positive investment tone that could further liberalise the market and consequently unlock vast market potential.

INDUSTRY LIBERALISATION CRUCIAL TO PROPELING DEMAND

Myanmar’s growth has been inhibited by decades of political instability, government mismanagement, and isolation from the international community. However, since the government adopted a series of political, economic, and administrative reforms in 2011, the country’s development has advanced rapidly. Succeeding administrations have pursued market liberalisations, opening up a range of sectors to private companies and foreign investments. Amongst the liberalised industries, the country has witnessed the momentous opening of the telecommunications sector. Such easing of sanction has resulted to a rush of investments from numerous international firms aiming to set a footing in the nascent telecom industry. More importantly, this has secured the upward trajectory of office demand across the country, specifically Yangon. At present, telecom corporations such as Ooredoo and Telenor are amongst the league of major tenants of the city, taking up sizeable office spaces mainly for operations.

More recently, the government has rigorously endeavored itself on further stimulating foreign investments, taking a concrete turn with the introduction of newer policies and reforms. Following the Ministry of Planning and Finance’s official announcement earlier this year, life insurance providers have finally been given the go-signal to operate in the country. While the notification remains relatively new, we anticipate both multinational and local insurers to add their spot to the Yangon office landscape. This expectation is patterned on the development trend observed in several of Myanmar’s neighboring economies wherein insurance providers have been viewed as one of the top office occupiers. As an industry practice, majority of these companies occupy a whole office building dedicated for staffing and is usually located in central business districts or dedicated finance hubs.

Figure 3: Yangon office tenancy mix

Source: Colliers International

In essence, Colliers identifies sectorial liberalisation as a fundamental facet in strengthening the demand for quality office spaces. Apart from its obvious contribution to the growth of market entrants in terms of volume, it would also mean improved scale of diversification amongst industries. As we view it, this eventual improvement should bode well in the Yangon office market, particularly the citywide tenancy mix.

For this quarter, Colliers has devised a new methodology in assessing the office tenancy mix. With the goal of properly assessing the companies based on their industry classification, Colliers opted adopting some aspects of the Global Industry Classification Standard (GICS®) developed by S&P Dow Jones Indices and MSCI. Compared to the GICS structure where it consists 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries, we kept the categorisation general by setting 16 major industry types to classify each companies included in the tenancy mix. The categorisation guidelines observed in this analysis critically considered the market’s current rate of development.

Figure 1: Yangon office stock (sq meters of gorss leasable area)

Source: Colliers International

As of Q1 2019, the financials sector topped the tally, representing almost 20% of the market share. Under this category, Colliers has considered the presence of banks, multi-sector holdings, investment trusts, and insurance providers in the city. Representing 17% of the citywide tenancy are the firms under the commercial and professional services industry. This is followed by capital goods (e.g. trading companies and distributors, industrial conglomerates, aerospace and defense, machinery and trucking, construction, engineering, etc.) and information technology, both sharing 11% each. Likewise, sectors such as consumer services (7%), transportation (7%), media and entertainment (5%), and real estate (5%) made it to the top list as well.

By and large, we can expect more efforts to encourage private sector activity to be detailed in the government’s long-term development agendas. While external economic headwinds and internal conflict continue to pose challenges, the government is making significant strides to continue reforms, foster reconciliation and sustain overall growth. With great potential to be found in key sectors, such as finance, energy, manufacturing, real estate, mining , and tourism, the country is poised to remain one of Asia’s top destinations for investment. This should similarly reinforce the rise in office space requirements in the years to come as more sectors experience easement from restrictions.

Table 1: Yangon citywide lease rate

Source: Colliers International

In the meantime, demand appeared generally stable with both occupancy and net take-up rates taking an upward track. We expect the demand to continually improve in H2 2019 as a result of the recent leasing commitments signed by various tenants. Given this, Colliers’ projection for the full year remains on track with the annual net take-up rate likely to reach 30,000 sq meters (322,910 sq feet) by the end of 2019.

Meanwhile, the citywide average rental rate further corrected downwards at USD38 per sq meter per month, a decline of 1.5% and 6% on a quarterly and annual bases respectively. In terms of location, Downtown rate remained highest at an average of USD43 per sq meter per month. Colliers expects the market to experience a more competitive rental environment in the next three years. This should create an impetus for potentially largescale businesses to scale up operations, as well as small and medium sized tenants to relocate in formal office buildings.

For more information, please contact:

KARLO POBRE
Deputy Managing Director| Myanmar
+95 (0) 979 573 3378
Karlo.pobre@colliers.com

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