Aviation
KNIGHT FRANK: ASIA-PACIFIC OFFSHORING MARKET GROWS FASTEST GLOBALLY
March 27, 2024
Amid a challenging business environment that is reducing sentiment among corporate real estate leaders, the Asia-Pacific offshoring market is forecast to more than double to US$185.1 billion by 2032, according to a new report by Knight Frank.
The independent global property consultancy firm noted that this growth is expected to drive an additional office demand of between 4.7 and 5 million square metres per year for the next three years.
In its report, "Knight Frank's Asia-Pacific Horizon: Harnessing the Potential of Offshoring," the firm examined the "essential factors" that define the region's appeal as the best location for offshore services and shed light on the industry's significant changes.
"In the global context, the market is forecast to grow to US$544.8 billion in 2032, reflecting an 8.5% compound annual growth rate (CAGR). Although North America will continue to retain its dominant market share, Asia-Pacific is expected to record the highest CAGR globally at 10.2%," Knight Frank said.
Tim Armstrong, global head of occupier strategy and solutions at Knight Frank, said the Asia-Pacific offshoring industry is witnessing an "unprecedented growth momentum."
"Leveraging global economic trends, the region has transformed into a thriving hub for offshoring. Within the region, India, Philippines, Malaysia and Vietnam have established themselves as offshoring centres worldwide," he added.
Armstrong went on to note that companies today face a multitude of challenges, including cost management, sustainability, talent retention and attraction.
"At a time when companies worldwide are looking to increase performance, efficiency and innovation whilst also prioritising cost control, Asia-Pacific offers considerably lower operating costs, at nearly 70% less than the US, based on Knight Frank research."
Armstrong added that for every square foot of office space, occupiers can expect to save on average US$70.86 in the four cities compared with mature markets.
"This translates to a staggering 54% cutback in occupancy costs annually," he further said.
The Knight Frank global head of occupier strategy and solutions went on to note that globally, the office sector is going through a generational shift with three distinct flights to quality taking place: a flight to sustainable buildings, a flight to amenity-rich offices, and a flight to offices that can provide greater flexibility.
"With the decline in confidence towards the office sector, most pronounced in the US, occupiers are turning to Asia-Pacific," he said, adding that high-quality premium office space in city centres and ESG-compliant buildings remain highly sought after by occupiers in this region as they prioritise 2030 net-zero targets.
"Moreover, the highly educated, versatile, and multilingual talent pool in the region's developing markets is well-equipped to deliver high-quality customer service, positioning them ahead of the curve," Armstrong said.
Resilience and appeal of Asian offices
Meanwhile, the Knight Frank report noted that global companies increasingly seek cost-effective solutions to minimise expenses, and a growing number are now looking towards offshoring functions as a strategic avenue — and within the region, these markets offer the best offshoring locations around the world.
Christine Li, head of research at Asia-Pacific, Knight Frank, noted that offshoring has emerged as a critical driver propelling office demand in these four hubs as they steadily expanded their footprint.
"We anticipate the potential cost savings to encourage offshoring activities. We have already observed this in India," she said.
From 2022 to 2023, leasing transactions involving Global Compatibility Centre's (GCC) proportion increased by 10%, accounting for 35% of the total market share.
Li said this trend was similarly observed in the other three key markets, the Philippines, Malaysia, and Vietnam, where offshoring is playing an increasingly significant role in driving demand for office spaces.
According to the Knight Frank Asia-Pacific Q4 2023 Office Highlights report, overall rents for the region declined 2.4%, with the average vacancy rate increasing by 1.24% for 2023.
It added that although market sentiment has gradually improved, it remains susceptible to changes in the economic landscape.
"Occupiers are still cost-conscious due to the challenging macro environment. The silver lining is that corporate occupiers continue to prioritise offshoring functions, fuelling headcount growth in regions that offer growth and innovation at a lower cost while maintaining efficiency in pricier locations," Li said.
She went on to note that, as such, occupiers concentrate on boosting office demand in these strategic locations while reducing real estate needs elsewhere.
"This strategic resource allocation helps mitigate rental declines in markets such as Vietnam and the Philippines, while rents have even strengthened in Malaysia and India despite higher vacancies," Li added.
Looking ahead, Knight Frank said the prime office markets of the four offshoring centres in Asia-Pacific—India, Manila, Kuala Lumpur, and Ho Chi Minh City — are expected to continue growing.
For India, Knight Frank noted that the vacancy rate improved marginally throughout 2023 from robust demand despite an increase in supply.
"The growing share of GCC in total leases will remain supportive of office market demand in 2024," it added.
For Manila, although rent contracted 11.7% in 2023, the vacancy rate remained resilient, with demand stemming from traditional and outsourcing firms adopting flight-to-quality and flight-to-cost measures.
For Kuala Lumpur, the report noted that a strong "flight-to-quality" trend is underpinning resilient rental growth in Kuala Lumpur amid tight new supply.
For Ho Chi Minh City, Knight Frank noted that rents in Vietnam's capital continue to adjust to the high volume of completions, as some landlords offer more competitive asking rents to maintain occupancy rates.
