CBRE launches report: The emergence of Asian Supertalls

​Hong Kong, July 7, 2014 - CBRE’s latest research report The Emergence of Asia Supertalls finds that whilst development of tall office buildings in Asia began relatively recently, Asia is now home to 55% of the total number of tall office buildings globally. China dominates the development pipeline in the supertall building category over the next five years, with the country accounting for 71% of the total future supply of supertall office buildings to be completed during the period, and with its tier II cities accounting for 51%.

Because of differentiators such as positive image and branding, building quality, and prime locations, supertall buildings in Asia command a rental premium of between 10 and 40% above the average Grade A rent in the same submarket. However, against this backdrop, there are pitfalls to some of the enthusiasm around supertall buildings, as well as potential concerns of oversupply.

The “build it and they will come” misconception

In recent years, governments in number of countries in Asia have thrown their weight behind the construction of supertall office buildings, defined as a building with a height of over 300 meters, as a way to enhance the competiveness of their business environment and establish their city as a financial center. Shanghai World Finance Centre and Guangzhou IFC were both constructed in accordance with this strategy.

In Asia, the impact of globalization and the relocation of manufacturing operations to cheaper markets have prompted authorities to reposition their economy and develop their financial sectors. The construction of supertall office buildings has been a key component of this strategy. For example, Taipei 101 was constructed as part of a move to grow the financial industry in Taiwan whilst in Kuala Lumpur the Petronas Tower was built in accordance with the government’s wish to reduce Malaysia’s dependence on the oil and gas industry and develop its financial sector.

“Within Asia, there is a perception that a high density of tall buildings is synonymous with being a successful financial hub. Supertall office buildings are viewed by Asian authorities as a means to enhance the competiveness of their business environment so their city can establish itself as a financial center or to reposition their economy under the impacts of globalization—a “build and they will come” strategy is commonly adopted by emerging financial markets in Asia,” said Andy To, Executive Director, Asset Services, CBRE China.

CBRE Research analysis reveals that based on Asia's leading cities for tall buildings globally, the tenant mix in supertall office buildings is similar to that in the Downtown district of Manhattan. Banking and financial services sector is the key tenant in supertall office buildings across the region, accounting for around 55% of total occupied space. Business services and legal firms are another key occupier of supertall office buildings, accounting for 16% of total occupied space, while the technology and telecommunications sector is an up-and-coming user of supertall office buildings and now accounts for 11% of total occupied space in such buildings in the region.

However, whilst certain cities and certain buildings in Asia have been more successful in attracting financial sector tenants, a look at the tenant mix of individual buildings in non-traditional financial hubs in the region paints a different picture: the likes of KK100 in Shenzhen, Guangzhou IFC in Guangzhou, China World Tower 3 in Beijing and Taipei 101 in Taipei all have a relatively lower proportion of financial sector tenants.

“In other cities, the industry specification of the local market has impacted the tenant mix of supertall buildings. This partly underlines why the ‘build and they will come’ strategy is often not as successful as expected. It takes time for the local market to refocus and adapt,” said Mr To.

For example, a number of major real estate companies are headquartered in Guangzhou. Several of these firms have taken space in Guangzhou IFC for self-use and the proportion of space occupied by tenants in this sector is therefore similar to the proportion of space occupied by financial services firms. Another example is Beijing, where oil and energy companies are one of the major drivers of office demand. Many large oil and energy companies have leased space in China World Tower 3 as their headquarters. Supertall buildings in Seoul’s Yeuiudo Business District have also so far failed to attract a critical mass of financial and related sector tenants. 

“This reflects the reality that there are far more important factors than the mere construction of supertall office buildings for a city to successfully establish itself as a regional or global financial center. For a ‘build and they will come’ strategy to succeed, it needs to be implemented alongside a host of other measures,” said Mr To, who highlights factors such as the business environment, legal and tax systems, market transparency, political stability, government efficiency, transport and telecommunications infrastructure, capital flows, human capital and reputational factors such as innovation as vital.

China supply concerns; opportunities for MNCs

Whilst new supply of supertall office buildings continues to increase, the recent slowdown in the Chinese economy combined with tighter controls on the shadow banking industry has resulted in weaker demand from the financial sector. This has led to growing concerns of oversupply in a number of markets.

Although office demand in China will continue to rise in the long term as the country continues to transition to a tertiary industry-driven economy, the level of demand in tier II cities will remain relatively weak compared to Beijing and Shanghai as these two markets are already firmly established as the country’s political, economic and financial hubs.

“CBRE Research believes that the existence and future completion of a large number of supertall office buildings in tier II cities such as Shenyang, Chongqing and Tianjin undoubtedly creates a risk of oversupply. These cities are merely regional hubs within China—not national or international financial centers—and lack the means to attract a significant volume of financial sector occupiers to their market. It is imperative that local governments be more realistic when forecasting office demand and planning land supply in order to ensure their city’s stable economic development,” said Jonathan Hsu, Director at CBRE Research. The topic of oversupply was also broached in the recent CBRE Research special report, China Offices: Reality Check.

Over the next five years the number of supertall office buildings in China (Shenzhen, Shenyang, Chongqing, Tianjin and Nanning) and South Korea (Seoul and Busan) will surge whilst Indonesia (Jakarta) will see the completion of its first supertall office building. “Financial sector demand will be insufficient to fill the large volume of new supply but this could provide opportunities for multinational occupiers in other sectors to secure high-quality prestigious office space in good locations for relatively cheap rents,” Mr Hsu adds.

This September CBRE will be gold sponsor for the CTBUH 2014 conference—the leading conference for supertall buildings worldwide. As a thought leader in supertall building management consulting and leasing, this will be the third consecutive year CBRE has presented at the event. This global event focusses on design, construction and operation of tall buildings and future sustainable cities, and takes place between September 16-19 at the Grand Hyatt in Jin Mao Tower, Shanghai.