The US-China trade war boosts office rents in Taiwan as companies come home

TAIPEI — High office rentals in Taiwan look like they’re here to stay.

The office space market in the self-ruled island is already overcrowded, in part thanks to reshoring — or the practice of bringing production and manufacturing for homegrown companies back to the country of origin.

Now, with the uncertainty from the trade war between the U.S. and China still lingering after more than a year, rents for offices in the densely populated capital of Taipei could continue to climb as Taiwanese firms consider returning home.

“The main reason is because there’s been a limited supply of new buildings,” Tony Chao, managing director at property consultancy Jones Lang LaSalle Taiwan, told CNBC in Mandarin.

Take-up rate of Grade A office space — or offices in premium locations — has been robust in recent years.

Vacancy rate has currently fallen to about 3% from over 10% just three years ago, Chao told CNBC. Vacancy rate in 2020 will likely drop even lower, to an average of 1%, Chao predicted.

According to Chao, the availability of Grade A office space has already been constrained, as many tenants renting properties that are more than 20-years-old have been looking for newer places. There has also been a trend in companies consolidating their corporate spaces to newer, swankier buildings in central locations, and a rise in co-working spaces in similar locales.

Taiwanese firms have for years set up businesses and manufacturing facilities on mainland China, but many have been returning home in recent years due to rising costs in China, as well as incentives by the Taiwanese government — even before the U.S.-China trade war. The bilateral trade fight has also spurred further reshoring as tariffs slapped on exports from China eat into profit margins.

While Taiwanese firms coming home from China is not a key driver for the property boom, it has further tightened supply, said Chao.

In 2018, the rent for Grade A office spaces in Taipei rose about 3% year-on-year to 2,728 New Taiwan Dollars ($90.40) per ping — which is equivalent to 35.6 square feet. Rental prices rose another 1.8% by the third quarter of 2019, according to the consultancy.

Despite the U.S.-China trade war, the Taiwanese economy has been resilient this year in part due to a trend of Taiwanese businesses returning home to navigate the tariff fallout. That’s given the current administration under President Tsai Ing-wen some political leverage ahead of January 11 general elections.

The strong demand for Taiwanese real estate contrasts with slower global leasing demand where the total net take-up rate dropped 5% by the second quarter of 2019, noted Jones Lang LaSalle in its third quarter report this year.

The suppressed appetite globally was in part due to dampened market sentiment and the fallout from the U.S.-China trade dispute, the consultancy noted.

Still, Chao pointed out that even though office property rentals in Taiwan have seen a revival in recent times, they are on average still lower than in 2000 — indicating an undervalued market.

It’s not just homegrown companies that are moving to Taiwan — international firms are doing the same.

A few high profile technology investments into Taiwan have caught the eye of the market.

In October, Taiwan approved a $850 million investment by tech giant Google, whose parent is Alphabet, to expand the company’s data center. In April, social media giant Facebook opened its new Taiwan headquarters.

According to Chao, there are a few other international names moving into the Taiwan market from China.

Taiwan has for years dominated the tech supply chain, most notably in the form of Foxconn, a major Apple supplier.

“Relative to the rest of the region, Taiwan is a democratic place with rule of law, and steady electric supply, with talent in the high tech sectors,” making it attractive to tech investments, said Chao.

That’s despite China claiming the island as part of its territory which Beijing wants to be reunified with.

Chao said the risk of a military conflict between the two sides is low, and whoever wins the presidential election will likely maintain the longstanding status quo in the relationship.

China has been trying to tout its “one country, two systems” framework to Taiwan for years. That structure is used to govern Hong Kong and Macao, and allows citizens from the two territories certain freedoms that mainland Chinese do not have.

However, popular support from Taiwanese has been low. The recent unrest in Hong Kong has not helped, and has in fact fueled further concerns. Meanwhile, Beijing has never renounced the use of force against the island and has said it will not tolerate Taiwanese independence.

In the first 11 months of the year, Taiwan attracted $10.2 billion in approved foreign direct investment — up 20% from the same period in 2018, according to data from Investment Commission under Taiwan’s Ministry of Economic Affairs.

Some analysts say while some capital fleeing the U.S.-China trade war has resettled itself in Taiwan, it’s too early to tell if the money is here to stay, or if it would be reinvested into the real economy. Taiwan’s economy has been plagued by stagnant wages and issues of youth unemployment.

Jones Lang LaSalle said in their latest quarterly report that the Taiwanese government’s drive to encourage firms to reshore production to the island has been strong, but its impact will inevitably start to moderate as the initiative matures.