The second and final part of the article will present more analysis on the serviced office sector in Yangon, scope of future supply and prices and alternative to standard commercial space.
Low occupancy
In our research we have found that despite the limited supply of prime office space, serviced offices in Yangon were not running at full occupancy. For OfficeHub, this could be because of they have been in the market for only eight months. We were informed that Keier received 200 inquiries in the past year and half but is only running at 50 percent occupancy. This, we were told, was because new companies wishing to do business in Myanmar had severely underestimated the conditions here and its impact on their cash flow and operations, forcing them to leave for other SE Asian markets like Vietnam and Cambodia. Apparently the high cost of serviced offices was not a major factor.
Lack of information
It is difficult for customers to gather information here, about anything let alone what serviced offices there are in the market. The serviced offices themselves have stated that they choose not to advertise. While there are certainly some advertisements in expat oriented publications like Myanmore, perhaps the serviced office providers have calculated that the circulation of these publications or websites does not justify the cost of advertising.
Scope of future supply
Serviced offices are not expanding – for example, Keier Group has put its plans for expansion (Keier 1, 2 and 3) on hold. One of the reasons could be the difficulty for service office operators to predict future demand. One of the reasons for the relatively low occupancy rate of serviced offices is because they were formally occupied by firms, which came in during the telecoms bidding process. The same happened with the oil and gas tenders. As it is impossible to predict when the government will take similar actions in the future, it is impossible to plan for such spikes in demand.
Another reason could be the impending entry of larger and more powerful serviced office brands into Yangon. Rumours that Regus PLC is moving into Yangon are unsettling some of the existing players. Regus will position itself to be a major player in the market, providing the highest quality office space. However Regus prices themselves, the smaller serviced offices will have to price maybe 10 to 20 percent lower in order to hold on to their customers, and when Regus first enters the market, it is likely that they will price themselves on par with the existing players in order to quickly build a customer base. Although most service offices are currently located in downtown Yangon, Dagon City has been slated as an area for serviced office development. Should Regus build their office there, this could attract clients who are tired of the growing traffic congestions in the downtown area.
Other serviced office providers whom we talked to were sceptical about the entry of newcomers into the market, citing the high cost of property and the steep learning curve of doing business in Myanmar. They were confident that existing serviced offices could continue to maintain their current rates for the next two years.
Future property prices
Despite their rates, the opinion of veteran developers is that serviced offices are not necessarily profiteering from the current market situation but that their high prices are a necessity for them to recoup the exorbitant costs they are paying to their land lords.
Serviced office providers have no intention of undercutting each other as they believe that the market is large enough so that they do not have to aggressively compete with each other.
It is inaccurate to project the percentage increase in rent from 2012-2013 to 2013-2014 and beyond. 2013 and 2014 were exceptional year because of the telecoms and oil and gas tenders being held. There was a spike in demand due to various companies coming in to participate in the tenders such as Telenor, Ooreedo, and SingTel in telecoms and Shell, Woodside and ENI in oil and gas. After the award of the tender a wave of consultancies and sub-contractors from these two industries would enter the Myanmar market like pilot fishes following the whales looking for office space. The telecoms, and oil and gas tenders, in addition to other aspects of market liberalisation in the last three years, is the reason for the 150-200 percent increase in property prices over the same period.
In any case, foreign investors whom we have interviewed have stated that prices are approaching the tenant’s threshold. Any further increase will simply push investment away, with negative results for Myanmar’s economic development.
Alternatives to Standard Commercial Space
Working from hotel
The option pursued by most SME’s and sole proprietors who have recently arrived in Yangon. With the spike in hotel prices (Sedona hotel has increased its room rate from $50 a night in 2012 to $200 a night in 2014); many businesspeople feel that it is impossible to pay for both a place to live and a place to work. In the past, major companies were also based in hotels, as these were the only places with a regular supply of power, internet and other amenities. Since the spike in demand for property in Yangon began, hotels are not renewing their leases with such companies and are converting their premises back into ball rooms and meeting rooms. The result of this is that the companies affected are now adding extra pressure on property prices as they are back in the market. Hotels are still renting out space for board meetings but these rooms can cost $100/hr.
Converting Condominiums and Villas
The usage of villas and condos for office space is a popular option; villas have been used by both MNC’s like Unilever as well as the multitude of NGO’s based in Yangon. Myanmar does not have the same zoning laws as other countries whereby commercial activities cannot be undertaken in residential areas. This is the most popular option for firms that do not have to worry about constant streams of visitors.
The key benefit of the villa option is its secondary function of providing accommodation to expatriate staff. If the company in question has less than 10 expatriate employees, then renting and converting a condo/villa to an office-cum-home is ideal. In the case of Telenor or Ooredoo, with a head count of over 2,000 employees each, most of whom are local, it makes more sense to secure their own 8-10 storey building as an office for reasons of prestige and security. For companies whose visitors are mostly suppliers and not end customers, it is convenient to be based in a less accessible part of Yangon where property prices are lower.
The downside is the initial capital required. While the price of a villa in Pyay Road is lower than one of the few purpose built office blocks in Yangon, it is still high by international standards. When dealing with local landowners, it is normal and expected to have a one-year lease which is fully paid up front. Most companies find it difficult to deliver $300,000 upfront to a landlord with little to no prospect of short term revenue.
The residential design of villas and condominiums does not usually make for a conducive working environment. While these details may affect some industries more than others, it is still worth noting that renovating or retrofitting a villa can cost between $500,000 and $1,000,000 and is not tax deductable.
To summarise, demand for serviced offices has come in two waves: during the telecoms, and oil and gas tenders and after. The nature of demand has been a sharp spike as foreign companies rush in to bid, then leave when they fail, or move into a permanent office when they secure the bid. When these companies first arrive, they need to set up office quickly, hence their preference for serviced offices.
After the tender has been secured by the operator, its suppliers and subcontractors follow. For these companies image is not a priority – as customers do not visit office quadrant often – and therefore they don’t normally go for serviced offices. Instead those firms opt for a three to four year office lease in Yangon.
There are certain clients who have secured relatively long leases with serviced offices, up to three years in fact. However we can assume that serviced offices can only be a short term solution given their costs.
The most likely consumers of serviced offices would be industries that are image conscious. Telenor is a good example of the behaviour of industries. During the telecoms tender they rented most of the space at My Yangon Office in order to hit the ground running but they have now moved into their own premises once they have been awarded their telecom licence.
Industries which are image conscious but do not necessarily have the money to spend on their own Grade A office, are forced to choose serviced offices over converted flats or villas in the short term. Those with high volumes of customers however, may be subtly rejected by serviced offices due to the disruption this will cause to other serviced office occupants as well as the security of the premises.
We can conclude that the primary source of revenue for serviced offices comes from industries that are image conscious. However, this source is transient until companies find their own offices. This explains the high price of serviced offices as well as its low occupancy rate. For companies which do not fall into that category, we recommend alternative options, specifically converting residential apartments to offices cum home.
Kevin is studying Politics and International Relations at the University of York in the UK. This article is a result of a project that Kevin was involved in while working at Consult-Myanmar Co Ltd in Yangon. Any views or opinion expressed in this article is the author’s own and don’t reflect Myanmar Business Today’s editorial opinion.
