Myanmar’s dramatic emergence from decades of military dictatorship to a democratically elected government is almost complete. The largely peaceful political transition has surprised many. More encouragingly, since the landslide election win for the National League for Democracy, the existing government and military leaders have committed to ensuring a peaceful and orderly transition, while the NLD has taken a conciliatory stance to bring the country forward. A continuation of this collaboration could see a boost in investor confidence to enter the market.
Even in its last breath, the outgoing government managed to push through several legislations. In December 2015, the Stock Exchange of Myanmar commenced operations. Last month, the Condominium Act was passed after years of deliberations. On Jan 15, the Directorate of Investment and Company Administration announced that the Myanmar Investment Commission had approved nine foreign investments, three local investments and five joint-venture investments, including two housing projects, one private hospital, 10 garment factories, one heavy machinery rental service and two wooden factories in January. On Feb 11, it was reported that Australian PanAust Group had been granted exploration licences for three mining blocks. PanAust is the first foreign firm to receive the licence after a new mining law was passed last December.
These changes in regulations have put in place positive catalysts for foreign investments. With many foreign investors still waiting on the sidelines, we expect more investments to materialise as the new government begins to take shape in the coming months. Based on an International Monetary Fund report in October 2015, Myanmar’s economy registered impressive growth of an average of 8.5% per annum for the past three years, making it the fastest-growing economy in Southeast Asia. This trend is expected to persist.
Figure 1
Office rent corrected but recovery expected
Based on our office rental index, computed based on a weighted basket of international-quality office spaces, Yangon office rent registered six consecutive quarters of decline as at end-2015. The office rent in 4Q2015 was 11% lower than the previous quarter and 64% lower than its peak. This was largely due to the completion of two office towers in Myanmar Centre in mid-2015.The current rent is at US$55 ($77) to US$65 per sq m a month. We expect the office rent in Yangon to inch upwards, as the demand for office space coming from various sources would help to fill the new supply coming into the market.
Office space demand has slowed but could pick up from 2016
Based on our survey of modern high rise office buildings, the overall office occupancy rate eased to 64% in 4Q2015. This was mainly due to the completion of Myanmar Centre late in the year. The centre is gaining good traction among potential tenants, as it is the first large-scale integrated development to reach the market. The older office buildings, such as Sakura Tower and Centrepoint Tower, are feeling the threat of the new entrants, losing tenants to them. Meanwhile, good-quality office buildings, such as the Union Business Centre and Union Financial Centre, were well taken up, with nearly 100% occupancy as at end-2015.
We expect the overall occupancy to pick up from 2016, as the older office stock might be redeveloped or refurbished. Demand for quality office space could also come from companies that have been operating in stand-alone houses and non-Grade A office premises, switching to larger and more prestigious, integrated developments. Lastly, foreign businesses are likely to increase their investments in the country, as the new government takes shape and possibly opens up more economic sectors to foreign participation.
Increase in new company formation suggests demand could increase
The potential increase in demand can be observed from the increase in the total number of registered companies. As at March 2015, the number of registered companies was 58,789.This suggests 8,309 new companies were formed within the year, a y-o-y increase of 16%. On average, 7,096 new companies were formed annually in the last four years.
Based on the assumption that an average of 7,000 new companies are formed each year, 20% of the new companies require office space in Yangon, each company employs five people and each person occupies 80 sq ft of gross office space, this will translate into an annual demand of 560,000 sq ft of office space. This means Yangon would require four new Sakura Towers every year to meet the demand for office space from these new companies.
Figure 2
Limited supply in the near term
There are several office building projects in the pipeline, namely Naing Group Tower II by Naing Group, Sule Square by Shangri-La Group, Times City by Crown Advance Construction and Crystal Tower @ Junction City by Shwe Taung Group. Some of these are expected to be completed in the next two to three years, which might provide short-term corrections in market rents and occupancy.
Flight to quality office space
For the Yangon office sector, we expect that the relative lack of quality office stock could result in rental at quality spaces being sustained at current levels. Over the short term, the lumpy nature of large, new completions will result in moderate volatility in rents. However, we expect yield compression to begin as the market starts to mature and more investors enter the market. This should provide earlier investors with sufficient upside that commensurates with the risk.
Figure 3
Tan Kok Keong is CEO of real estate consultancy REMS Advisors and co-founder of Fund places, a real estate-dedicated crowdfunding platform. He can be reached at kk.tan@rems.asia.
This article appeared in The Edge Property Pullout, Issue 716 (February 22, 2016) of The Edge Singapore.