Sri Lanka grade A office space demand exceeds supply – JLL

Aug 22, 2016 (LBO) – Sri Lanka’s capital office market has occupancy as high as 95 percent and occupiers and supply of Grade A office space remains minimal, the latest Jones Lang LaSalle Sri Lanka report says.

“Demand for Grade A space in 2016 will be around 3.8 million sq ft, and with the current supply at approximately 2.3 million sq ft, this will leave a shortfall of 1.4 million sq ft,” Gagan Singh, chairperson, Jones Lang LaSalle Sri Lanka said.

“Lease renewals are expected to be done at notably higher rents. As negotiating power will be with the landlords, quoted values are expected to go up, as will execution values.”

JLL 2 - Supply Shortage

Select occupiers had no other option but to consider strategically located Grade B developments to execute expansion plans, JLL said.

Along with the conventional industries, such as the banking and financial services (BFSI) sector and the manufacturing sector that generate office space demand, government agencies have been very active for the past three to four quarters in leasing office space in brand-new office buildings.

“This trend is expected to continue in the near- to medium-term and should make way for noticeable rent and capital value appreciation in upcoming quarters,” Singh said.

“This will lead to rent appreciation. The rents in three pockets Colombo 1, Colombo 2 and Colombo 3 – are shown in the table. The y-o-y rent appreciation has been notable.”

JLL 3 - Rent

Currently, the landlords of Grade A buildings are able to increase rents 10-15 percent biennially and the excellent physical and social infrastructure of the buildings helps produce office environments that are conducive to business.

JLL Research estimates that the pace of capital value appreciation is likely to be higher than rent appreciation in upcoming quarters.

The current rent yield stands at 5.0 percent and this is likely to dip minimally by 10-20 bps in the upcoming quarter. Nevertheless as the capital value appreciation is expected to be in the range of 7-8 percent y-o-y, this offers total returns in the range of noteworthy 11 percent to 14 percent non an annual basis.

The selection of office space is based not only on the location and the office space infrastructure but also on modern amenities, parking, proper maintenance, energy savings, power backup and security.

These ad hoc services play a key role for corporate occupiers in improving operational efficiency.

Hence, the office space market, particularly Grade A, would be a lucrative avenue if a prudent understanding of the relevant occupier’s demands is echoed in the offering.