DTZ Research PROPERTY TIMES Office buildings converted into hotels Taipei Q2 2015 This quarter, grade A office rental remained stable in most projects, but new buildings nudged the citywide average rent up to NT$2,490 (US$83) per ping per month. The completion of Union Recreation Building raised the vacancy rate by 0.9 17 July 2015 percentage points to 9.8%. Due to strong demand from tourism, many old office buildings are being converted into hotels. Contents In the industrial sector, because of limited new supply and easy access by public Economic overview 2 transport, vacancy rate in the Xihu Section held steady at a low level. Tenants Office 3 requiring large areas or whole buildings for headquarters purposes had to search in Wende and Jiuzhong sections. Rental is expected to continue to rise in Xihu Retail 4 Section, but will remain flat in Wende and Jiuzhong. Industrial 5 The outflows of real estate investment by insurance companies and property tax Investment 6 reforms kept the market on edge. The investment volume in Q2, excluding land transactions, had a steep dip to the third lowest point since the financial crisis of 2008. The market slowdown is expected to have an impact on the already low transaction volume later this year. Figure 1 DTZ office index (2006 – 2016F) Author 250 Wendy Hsueh 200 Head of Taipei Research +886 2 8788 3288 150 [email protected] 100 Contacts 50 Andrew Ness 2015F 0 2016F 2005 2007 2008 2009 2010 2012 2013 2006 2011 2014 Head of Greater China Research +852 2507 0779 [email protected] Office Rent Index Office Price Index F=Forecast Fergus Hicks Source: DTZ Research Global Head of Forecasting +44 (0)20 3296 2307 [email protected] www.dtz.com Property Times 1 Taipei Q2 2015 Economic overview Table 1 Taiwan's GDP in Q1 2015 increased by 3.37% year-on-year (y- Economic indicators o-y) to NT$4,131.39 billion (US$130.8bn) (Table 1). Owing to a Indicator Period Unit Value Y-o-y weakening global economic recovery and a slowdown in the change growth of emerging markets, the GDP annual growth rate was (%) revised down to 3.28% from the previous forecast. GDP Q1 2015 NT$ million 4,131,391 3.37 Aggregate export figures in May 2015 increased 9.1% month- Total import May on-month (m-o-m) but decreased 5.7% y-o-y, to NT$785.90 NT$ million 619,600 -14.70 billion (US$25.63bn). Electronics, machinery and transportation value 2015 equipment exports showed mild growth, while mineral products Total export January and chemicals declined. Aggregate imports in May 2015 NT$ million 785,900 -5.70 value 2015 decreased 14.7% y-o-y (Table 1), narrowing the gap between exports and imports. Unemployment April % 3.63% -0.28 pts rate 2015 The unemployment rate in April 2015 declined 0.28 of a percentage point y-o-y to 3.63%, a 15-year low. The number of Consumer price May -- 103.14 -0.66 unemployed was down 10,000 m-o-m due to the decrease in index 2015 business downsizing and closures (Table 1). April Visitor arrivals thousand 888.01 -0.43 With the continued rise in oil prices and the termination of the 2015 electricity bill refund plan, the CPI reached 103.14 in May 2015 April (Table 1), up 0.24% m-o-m but down 0.66% y-o-y. The decline Building units units 23,377 -17.02 in the price of eggs, fruit and meat offset the increase. 2015 Source: DGBAS of Executive Yuan In April 2015, the number of total visitor arrivals was 888,011, a y-o-y decline of 0.43%. Most of the visitors were from China, accounting for 40.40% of the total at 358,798. The number of inbound Chinese visitors was down 4.88% y-o-y as a result of the imposition of a daily quota for Chinese tourists (Table 1). As a result of the global economic recovery in Q1 2015 being weaker than expected, this month’s total indicator score from the Council for Economic Planning Development on the overall economic outlook decreased from the 22 points in the previous month to 16 points. However, with the improvement in consumer spending and employment performance, Taiwan’s economic prospects are for mild growth. Market sentiment remained conservative in Q2 and the total building transaction volume in Taiwan in April was 23,377 units, a decrease of 17.02% y-o-y and an increase of 6.03% m- o-m. Compared with the previous month, Taipei City and Kaohsiung City showed a decline in transaction volume of 8.99% and 5.76% respectively. The transaction volume in other major cities also saw a downward trend, except for New Taipei City, where it increased sharply by 16.75%. Now that the property tax reform has been passed by the legislature, the uncertainty looming over the market is gone and end users in the residential segment are expected to return to the market. The market may turn active later this year if the gap between buyer and seller expectations closes. Nevertheless, in non-prime areas there will be downward pressure on property prices due to oversupply. www.dtz.com Property Times 2 Taipei Q2 2015 Office Table 2 This quarter, grade A office rental remained basically stable in Grade A office market statistics most buildings, but new supply nudged the citywide average Vacancy Rental Rental q-o-q rent up to NT$2,490 (US$83) per ping per month. The District rate (%) (NT$/ping/month) change (%) absorption of grade A office space was steady despite the new supply, but the completion of Union Recreation Building raised Western 2.8 2,120 0.0 the vacancy rate by 0.9 percentage points to 9.8%. The highest take-up in the quarter was 2,000 ping in Dunbei Minsheng Nanjing / District (Table 2, Figures 2 and 3). Songjiang 21.9 2,100 6.3 The average size per leasing transaction was about 150-200 Dunbei / ping, with tenants coming from securities, finance, Minsheng 13.3 2,290 0.0 network technology and professional consulting service companies. A large lease was taken out in Dunbei Minsheng Dunnan 4.3 2,390 2.4 District, while E. Sun Securities leased about 1,200 ping in Hung Tai Financial Plaza. CTBC Bank exited 3,000 ping in Uni- Xinyi 9.4 2,930 -0.2 President International Building and moved to its Nangang Overall 9.8 2,490 0.4 headquarters. Next quarter, a German software firm will take up two storeys in Hua Nan Bank Headquarters and the Regus Source: DTZ Research Business Center will further expand in Xinyi District, at the Cathay Landmark Building. These activities will be reflected in Figure 2 the absorption in Xinyi District in the coming quarter. DTZ office index (2006 – 2016F) Banks continued to adjust the use of their real estate assets into higher value purposes. Hua Nan Bank, which moved its headquarters to Xinyi District, is transforming its KaiFeng and 250 Zhongshan Buildings into hotels. Both are eight storeys, and 200 they have areas of 1,692 ping and 1,248 ping respectively. Meanwhile, the bank is also leasing its original headquarters in 150 Chongqing South Road. Due to strong demand from tourism, many old office buildings are being converted into hotels. For 100 example, the entire 12-floor Xihua Building, owned by the Lungyeng Group, was leased to a mainland Chinese firm for 50 hotel purposes. 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016F Later this year, new supply of grade A office space, including 2015F Taiwan Cooperative Bank Headquarters Building, Fubon Life Dunnan Building and Cathay Landmark Building, will come on stream and provide 52,000 ping of space. These new buildings Office Rent Index Office Price Index are expected to attract tenants from older premises and, Source: DTZ Research because of their high quality, rent is expected to increase slightly. Figure 3 Grade A office supply (ping), net absorption (ping) and vacancy (%) (2006-2016F) 90,000 16 14 70,000 12 50,000 10 30,000 8 6 10,000 4 -10,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016F 2015F 2 -30,000 0 New Supply Net Absorption Vacancy Rate Source: DTZ Research www.dtz.com Property Times 3 Taipei Q2 2015 Retail Figure 4 Retail sales from January to April 2015 reached NT$366.4 Sales of general merchandise (NT$bn) (2006 – Apr. 2015) billion (US$12.17bn), a y-o-y increase of 4.7% (Figure 4). With (NT$bn) the changes in modern lifestyles and shopping habits, supermarkets are actively opening new branches in different neighbourhoods. Pxmart and Simple Mart, two supermarket 12,000 chains in Taiwan, have cooperated with banks to issue credit 10,000 cards with certain privileges, and this marketing strategy has 8,000 built strong customer relationships. This was reflected in the turnover figures, which from January to April 2015 reached 6,000 NT$55.7 billion (US$1.85bn), a y-o-y increase of 7.5%. 4,000 2,000 This quarter, rent in the Zhongxiao retail hub remained high, 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 and vacancy rate increased to 4.8% q-o-q (Table 3). Landlords 2015* would rather leave their properties vacant to wait for a higher offer than lease space at lower rents.