KUALA LUMPUR (March 27): The Asia-Pacific offshoring industry is witnessing an unprecedented growth momentum with Malaysia being one of the top countries of choice. This simultaneously plays a role in driving demand for office spaces, according to a statement by Knight Frank on Wednesday.

The statement is a summary of Knight Frank's Asia-Pacific Horizon: Harnessing the Potential of Offshoring report. Besides Malaysia, countries such as India, the Philippines and Vietnam have also established themselves as offshoring centres worldwide.

In the statement, Knight Frank Asia-Pacific head of research Christine Li said, “Offshoring has emerged as a critical driver propelling office demand in these four [countries] as they steadily expanded their footprint. We anticipate the potential cost savings to encourage offshoring activities. We have already observed this in India.

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“From 2022 to 2023, leasing transactions involving Global Compatibility Centre’s (GCC) proportion increased by 10%, accounting for 35% of the total market share. 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.”

In terms of the Malaysian office market’s resilience and appeal, it ranked as the third-best outsourcing location consecutively since 2004 and offers an estimate of more than 8% share of the Asia-Pacific offshoring market. The report also found that the country had strong government support to develop digital skills.

With regards to the market recovery for Asia Pacific as corporate occupiers prioritise offshoring functions, the statement said overall rents for the region declined 2.4%, with the average vacancy rate increasing by 1.24% for 2023. Although there has been a gradual improvement in market sentiment, it remains susceptible to changes in the economic landscape.

Li further explained, “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.

“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.”

Meanwhile, the report also provided an outlook for the prime office markets of the four offshoring centres in Asia-Pacific. In Kuala Lumpur, Malaysia, a strong flight-to-quality trend is underpinning resilient rental growth in Kuala Lumpur amid tight new supply. The statement said tenants have been taking the opportunity to relocate to newer, technologically advanced buildings, resulting in a rise in rental prices.

The statement said that although rent in Manila, the Philippines, 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.

Rents in Ho Chi Minh City, Vietnam, the statement shared, continue to adjust to the high volume of completions, as some landlords offer more competitive asking rents to maintain occupancy rates. Substantial supply is expected in 2024, pressuring rents further.

Within the average Indian Tier 1 cities, 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 the office market demand in 2024, the statement said.

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