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Colliers Property Report – Yangon Office Stock Q3 2019

LEASE RATES TO STABILISE IN THE NEAR TERM

Summary & Recommendations

Yangon’s building completions have markedly slowed down over the last nine months. In fact, only an addition of roughly 2,580 sq meters (27,770 sq feet) was recorded since the year started. Although the citywide occupancy rate marginally improved due to the limited entry of new supply and the significant price reductions in some projects, the pace of absorption has remained sluggish. Nonetheless, demand is still expected to increase especially in the next two years with potentially better macroeconomic situation in the country. While more office buildings will come online in the next two years, deferrals in construction may hamper further decreases in rental rates. Nonetheless, any significant increase in rents may lead to a trend where occupiers will start looking into other competing projects. Thus, we advise developers to expedite the completion of the existing under construction developments and eventually launch new projects.

PROJECT COMPLETIONS TO BE MUTED IN 2021

In the last nine months, Yangon has observed a limited entry of new projects. The Central 9 by Yee Yee Htun Development remains the newest office tower introduced in the city. Unveiled in early January, this Grade C project is situated in Mayangone Township and has delivered a modest addition of approximately 2,580 sq meters (27,770 sq feet). This has steered the aggregate supply stock to reach nearly 390,490 sq meters (4,203,200 sq feet) of leasable space as at the end of Q3 2019, an uptick of 0.7% YOY.

The pace of completion in the next fifteen months will likely replicate the trend observed in 2018 wherein the tally of new projects eventually picked up towards the latter part of the year. In the next three months, an addition of approximately 54,560 sq meters (587,280 sq feet) of Grade A (Time City Office Tower by Crown Advanced Construction Co., Ltd.) and Grade B offices (Mindama Office Center by China Company Ltd., Maha Nawarat Office Tower by Maha Nawarat Myay Co., Ltd.) is anticipated. In 2020, future projects will mostly be under the Grade A (e.g. Harbour Trade Tower, M Tower, and Y Complex) tier. These buildings will be constructed by reputable developers (e.g. Mottama Development Co., Ltd., and Y Complex Co., Ltd.) and will only be launched until H2 2020. Once completed, Yangon will witness the highest annual addition (72,570 sq meters or 781,137 sq feet) recorded in the last four years.

Meanwhile, given the frequent deferrals in construction of majority of the developments in the pipeline, the probability that 2021 will witness a dearth of completions is high. This, in turn, has led Colliers to revisit the supply figures for 2021 and onwards. Previously scheduled in H2 2021, developments such as HAGL Tower 3 & 4 by Hoang Anh Gia Lai Myanmar Co., Ltd., and YOMA Central Office Tower by YOMA Land has been moved to H2 2022.

The number of future planned projects will soon increase further given that other potential developments are still in planning phases. Though, most of these potential new projects are practicing a probing approach as investors and developers await further clarity in the market as well as the upcoming government election that is set to happen in 2020.

 

CONTINUOUS RENTAL AND ABSORPTION DROPS IN Q3 2019

Relocations with space reduction characterised the leasing activities over the past three quarters. This has contributed to the marginal improvement in the occupancy level and the relatively low absorption rate. As of Q3 2019, the total occupied stock reached around 265,600 sq m of leasable space and only registered a movement of nearly 12,000 sq meters. This is a decrease of almost 72% from the same period last year. Meanwhile, the citywide occupancy rate stood at 71.2%, an uptick of 0.15% QOQ and 1.4% YOY. The upturn was mainly driven by the relocation of select few established firms and the movement of some small-sized tenants from non-office spaces combined with the stationary supply during the quarter.

Apart from location and rental considerations, developers planning to invest in office properties are advised to similarly pay attention to the efficiency of design. Colliers thinks that new supply of lower quality will find it difficult to fill up the space as the demand for this segment is lower. Basing from the performance of newly completed buildings in the last few quarters, it can be seen that buildings with sustainable and modern design will attract more tenants. On a larger scale, Colliers sees new market entrants to continually await clarity from the results of the government reforms, and further liberalisation of other key investment sectors. The recent easing of sanctions for foreign banks and foreign insurance providers should strongly facilitate growth in occupancy and absorption levels in the next six to twelve months. Likewise, a large additional supply coupled with the growing positive business sentiment is expected to drive intense competition amongst office buildings, at least up to the end of 2019. Some new and future Grade A office buildings will seemingly push the rents down to attract more tenants. Certainly, this will provide tenants with more building options to move into and find better quality and yet affordable office spaces in the future. The current market situation allows office tenants to better negotiate the office buildings they are occupying.

Meanwhile, rents have been continuously correcting since the peak in 2014, closing at a citywide average of USD38 at Q3 2019, a decrease of 3.8% and 9.2% on quarterly and annual bases, respectively. Newly launched developments have begun offering much more competitive asking rents.

In terms of location, office buildings in Downtown still charge the highest rental rates at USD41 per sq metre per month on an average, followed by the Inner City at USD39 per sq metre per month, and lastly the Outer City with USD33 per sq metre per month. Stable rents are expected at least in the near term. The slow moving inventory will keep a check on the rental values. Meanwhile, the sizeable additional supply in the near to medium term will likely exert downward pressure to older, lower quality office rents albeit at a modest degree. In a bid to ensure a higher level of overall returns in their asset portfolio, we see few landlords starting to engage in a more active lease management. While majority of landlords have been offering greater incentives and more palatable rental levels to achieve higher occupancy levels, an emerging proportion of these leases offered in the market are trending towards shorter tenures. A longer lease secured at current softened rents may effectively cap the potential rental upside when the market picks up. As such, we see a stronger preference from some landlords to adopt a shorter lease for selective tenants.

Paul Ryan Cuevas
Senior Analyst | Research
Myanmar
+95 0 9 960 381 584
paulryan.cuevas@colliers.com

Source : Collier

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