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The ripple effect
Limited new supply, escalating prices and strong demand, sees office rentals spilling over to fringe Central Business Districts and beyond. Alex Frew McMillan reports.
The doubts that are swirling in the minds of residential property buyers and owners in Hong Kong at the moment aren’t clouding commercial tenants. Their main problem is finding enough space.
The vacancy rate for office space in Central dropped to 1.1 percent in June, another new record low, according to real-estate agency DTZ. Not surprisingly, the space squeeze is also producing record rents, hitting HK$122 per square foot per month.
Alva To, the head of consultancy for North Asia at DTZ, notes that Central office space is on FIRE ― the finance, insurance and real-estate industries. That sector and the related professional services that go along with it have set the market alight and continue to burn through the limited commercial space that is available downtown.
Companies that are new to town also often feel they have to set up in Central. But the competition for space is pushing established companies to explore other areas of Hong Kong.
“Central’s office market can count on the buoyant demand from the FIRE sector and companies that need to establish a presence in the prestigious Central Business District (CBD),” To says. “Thin supply in the core CBD has prompted Central-specific corporations to pay high rents, or move to districts such as Island East [Quarry Bay and Tai Koo], where the ample supply of larger floor plates has attracted many tenants in need of expansion.”
It has been quite a streak for commercial space. Rents have skyrocketed, and in fact the three months through June marked the 20th consecutive quarter of rent increases, an unprecedented run for Hong Kong that dates back to 2003.
“One of the critical concerns and challenges for Hong Kong is the complete lack of stock in the market,” says Piers Nickalls, the director of the commercial division at real-estate agency Colliers.
“The CBD of Hong Kong is undoubtedly in the top two or three financial districts in the world,” he adds. “Compared to London, New York, Frankfurt or Tokyo, there are no cranes – or any evidence there will be any cranes over the next two to three years. What we are seeing is an acute lack of supply.”
New companies continue to come into Hong Kong from both mainland China and the West. Some companies that missed out on the surge into Eastern Europe are now focusing on Asia and determined not to miss out this time round.
“When you are a company looking for space in a new market, you do not compromise on location,” Nickalls says. “They will pay the rents in Central because they are looking to recruit new staff and trying to acquire new clients.”
The determination of newcomers to horn in on Central is making life difficult for the companies that are already there. Commercial real-estate brokers say they are now being asked to approach existing tenants in Central to see if they would consider being bought out of long-term contracts and paid to move to another part of the city.
“Firms that cannot afford to move in case of losing staff and key clients in Central are displacing clients into the areas like Wanchai, Causeway Bay and Quarry Bay,” Nickalls says. “North Point and Quarry Bay have the next biggest supply [of Grade A office space], and a big differential from Central, so occupiers in that core CBD are seriously considering these locations.”
The epicentre of the high rents, Central, then produces a ripple effect, a little like an earthquake, or a tidal wave. As tenants leave Central for Wanchai and Causeway Bay, they force prices higher there – and force existing tenants to move away.
“Commercial rents are up 31 percent for Wanchai, and they are displacing renters into places like Quarry Bay,” Nickalls says. “Once Hong Kong Island reaches a level that cannot continue, tenants go to other places such as Kowloon Bay or Kwun Tong.”
DTZ says that the take-up of office space in Wanchai and Causeway Bay hit 166,647 square feet in the second quarter, up 55.1 percent over the first quarter and up an eye-popping 530.7 percent over a year ago. Vacancies fell from 3.3 percent to 2.3 percent.
“This indicates a strong underlying demand for prime space in the nearby areas of the CBD, as many companies that need to move out of Central but do not prefer locations as far as Island East would choose Wanchai and Causeway Bay,” says To.
Rents in Wanchai and Causeway Bay are now rising faster than in Central, up 12.5 percent in the second quarter, over the previous three months, compared with Central’s increase of 5.2 percent. Of course, the rate itself is much lower, an average of HK$45 per square foot per month, a little over one-third of the record HK$122 in Central.
Office rents in Island East are just HK$30 per square foot per month. So the gap between offices in Quarry Bay/Tai Koo and Central has grown from HK$88 per square foot in the first quarter to a difference of HK$92 per square foot in the quarter through June.
That HK$92 gap is still for top-level office space, so it is “sending tenants with non-essential reasons to remain in Central to relocate to other decentralised districts such as Island East, and this underpinned the rental growth of the district,” says Mark Price, DTZ’s head of business space.
The rents do not yet factor in the biggest project in the Quarry Bay area, the 70-storey One Island East. That has added another 1.3 million square feet to the market, in terms of space already taken up but most rental deals were struck in the second half of 2007 and the first three months of this year.
Exclude that huge new project, and the total take-up of Grade A office space on Hong Kong Island, at 251,081 square feet, was down 33.6 percent in the second quarter, compared with the first, and up just 1.2 percent from the same time a year ago, according to DTZ.
Besides the gains in Wanchai and Causeway Bay, and a boost in Tsim Sha Tsui, all other main commercial neighbourhoods have seen the take-up of new space start to fall.
There are a couple of reasons for that. The take-up in Central fell 91.7 percent from the first quarter, while take-up also fell 40.9 percent in Sheung Wan. But that is because there is very little space left to occupy.
The falling amount of new space being occupied in other areas may suggest something different. The ambivalence in sentiment shows that even office occupiers are worried about potential problems from the credit crunch and suffering US economy.
Piers Brunner, the chief operating officer in Asia for Colliers and the managing director for Hong Kong, says Hong Kong’s property picture is “probably more confused over the next 12 months than it has been for some time”.
“To be fair, sentiment is probably at one of its lowest points in the last few years,” Brunner says. “There are genuine concerns out there on inflation and the rising cost of oil and food, concern that the stock market hasn’t fared very well in the last six months.”
Colliers notes that the overall increase in commercial rents slowed to 4.9 percent in the second quarter, a break from a furious 15.3 percent increase in the first quarter. Professional firms either hesitated to commit to big-dollar deals or looked for cheaper space in outlying areas.
There is a little new space coming on the market in the second half of the year, with the Nexxus Building adding more than 264,000 square feet in Central. The first phase of the Kwai Chung Town Lot 215 development will add around 600,000 square feet there.
Between 2007 and 2009, the biggest addition of new space will be in Kowloon East. DTZ predicts more than 6.2 million square feet of office space will come on stream in Kwun Tong and Kowloon Bay. Rents there are around one-fifth the rate in Central. These projects are likely to lure back-office operations, with landlords likely to offer competitive rents and incentives for new tenants.
Colliers is still predicting increases for the rest of the year in commercial rents, but at a slower pace. It expects rents for Grade A office space to rise 15 percent in the next 12 months, with capital values increasing a modest 5 percent.
“There are no really forced sellers in the market, it is not like it a distressed market,” Brunner notes. “We are still experiencing a period of very tight supply.” |
