 Overall vacancy trended down by 40 basis points (bps) to 8.0%. Demand for Grade A office space in Xinyi has tapered-off slightly as a consequence of the rapidly escalating occupancy costs for the sub-market. Over the second quarter, Xinyi was the only area not to record a drop in its vacancy rate, which edged up 10 bps.

 Dunhua North and Non-core CBD enjoyed the largest contraction in vacancy rates, which fell 1.2 and 0.8 percentage points respectively.  Dunhua South saw a smaller drop of 40 bps against the backdrop of limited vacant space available for lease.

 A full 50% of the Grade A vacancy is concentrated in two of Xinyi’s premier properties—which also offer the only opportunity to lease more than 2,500 ping of Grade A space—suggesting any large occupier will be forced to pay a premium should they desire relocation.

 Grade A rental levels were up a respectable 1.8% Q-o-Q (9.0% y-o-y), underpinned by a healthy 3.4% Q-o-Q jump for the Xinyi sub-market (16.6% y-o-y). The other three sub-markets all registered rental growth of between 0.5 – 0.6% for the 2Q08.

 One prominent institutional landlord raised rents throughout its entire portfolio of Grade A properties. It is worth noting that life insurance companies have the capacity to put upward pressure on the entire market’s rental level given that they control a relatively large proportion of the stock.

Summary of 2008 Q2 rent and vacancy values for the Grade A office market:

In the future, we expect to see the following emerge with respect to the Taipei office market:

 We anticipate the overall Grade A vacancy rate will drop below 5% before the next parcel of new supply arrives—the Walsin Lihwa Building—of which a sizeable portion has been pre-leased by Citibank.  Assuming historical net absorption figures remain stable, demand has the potential to outstrip new supply over 2009 and 2010. However, this is contingent on the construction progress of projects in the pipeline.

 Rental growth will be underpinned by the aforementioned dearth of Grade A supply.  This will be further reinforced by the fact that a large portion of the office market is dominated by a few large players, giving them a distorted amount of influence in setting rental levels.

 Landlords in areas outside Xinyi will have the capacity to increase rents now that there is a sizeable premium for Xinyi’s space. This rental growth will be supported vacancy levels that average 4.9% across the three sub-markets – Dunhua North, Dunhua South and Non-core CBD.

 We do not expect a large injection of new supply until Grade A office capital values make up some lost ground on high-end residential prices. This is owing to the capability of developers to choose between residential or office projects on most of the land in Taipei City. Accordingly, if a developer can realize a much bigger profit from building high-end residential, there is little motivation to undertake office development.

Taipei, July 9th, 2008 –The Jones Lang LaSalle, Research team has completed a review of commercial office data from the second quarter of 2008 and is preparing to publish the Asia Pacific Property Digest - Taipei (Q2 2008).  The full report will be released later this month and will show:

Xinyi:
Although Xinyi experienced a rare quarter in which there was no decline in its vacancy, it will continue to see the rate trend down as tenants that have previously concluded agreements complete their fit-outs and move into new offices.

Dunhua North:
Excluding take-up achieved through owner-occupied buildings that came on-stream, Dunhua North has outperformed the other sub-markets with respect to absorption over 1H08, while its vacancy rate has fallen from 7.9% to 4.7% for the same period.  With Xinyi landlords now demanding a 30% premium over their counterparts in Dunhua North, we expect to see respectable rental growth in the latter, particularly now that nearby Songshan airport has started hosting direct flights to China.

Dunhua South:
As with the recent past, there is very little space for lease in Dunhua South.  We do not anticipate a change in this, with sustained rental growth coming on the back of lease renewals. Rents are up 6.5% when evaluated on a year-on-year basis.

Non-core CBD:
With a vacancy rate of just 6.2% and Xinyi’s average rents 44% more expensive, Non-core CBD should experience a similar situation to Dunhua North. Rents are up 2.1% y-o-y.

Ms. Sherry Wu made the following comments:

“Over the second quarter we continued to see most occupiers take a wait-and-see approach, either by choice or because the head office demanded it from them. Having said that, the second half of the year looks promising and we are anticipating to see demand improve during the fourth quarter.”

“With respect to the Taipei office market, I think it is important to take into consideration the global macroeconomic environment because it is often multinational (MNCs) companies that lease Grade A office space. A number of MNCs have put expansion or relocation plans on hold in response to the sub-prime fallout and rapidly rising oil prices. Furthermore, the rise in oil prices has led to domestic inflation, of course, which has hit domestic occupiers as well as consumer confidence. When we factor in the poor performance of the market (TAIEX), which is a product of the problems, it is not encouraging for the current health of domestic businesses either.”

“So, although the underlying fundamentals for strong rental increases are intact, there are other factors that are hampering the huge lifts that most landlords would like to impose. Furthermore, the optimistic sentiment that landlords have has also been stimulated by recent political events.  So while most landlords would like to see their headline rents at NTD 3,000 per ping per month, the current market won’t, or can’t, accept this.”