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Office Dynamics
Offices in Hong Kong are following the residential market’s lead … or maybe vice versa
| Text : Elizabeth Kerr | Photo : www.thinkstockphotos.com |
Whether you do it at home or in a gleaming glass skyscraper, chances are you work in an office. If you’re a foreign national, it could well be in a branch office and if you’re a resident — naturalised or native — you’re
probably renting space, ideally, in a choice address. Whatever the case may be, like many Hongkongers looking for homes, it’s slim pickings out there for businesses. Like the residential market, the commercial sector is in the midst of a supply crisis that’s leading the few existing premium locations to record prices.
Economics are cyclical and most analysts are of the mind that we’re in an up cycle, after a short but intense period of recession starting in 2008. Regional economic growth for the second quarter of 2010 picked up across
the board on the strength of intra-Asian trade and consumer spending. At the head of the charge are the financial services, many of who have returned to patterns of global movement. Hong Kong Sotheby’s International Realty and Jones Lang LaSalle have both stated their residential leasing has increased due to new resident arrivals working in finance, and both see continued growth for the near future. Serviced apartments catering to the financial sector are springing up almost weekly.
Within Asia, Hong Kong and Singapore are at the head of the office crest. Colliers International reported in its July Asia-Pacific Office Market Overview that Barclays Capital has pre-committed to 350,000 square feet of space in the Marina Bay Financial Centre’s Tower 2 based on the belief labour headcounts would increase soon. AXA leased 180,000 square feet in Hong Kong’s Landmark East and an additional 30,000 in Exchange Tower in March’s sub-market. This kind of activity led a to quarterly rental growth rate of just over 1 percent.
Residential and office leasing are “Two different market segments but they are related in the sense that an increase in floor area leasing requirements in the office sector usually goes together with an increase in number of employees including expatriates in the sector, thus creating leasing demand for luxury residential units too,” explains Simon Lo, Director of Research & Advisory for Colliers International in Hong Kong. “Recently, we know a number of expatriates turned from renters to buyers, since rents have been going up in tandem with prices and residential mortgage rates have been staying low at about 1 percent. Instead of using their housing allowances to lease, expatriates would like to buy their own homes in Hong Kong, particularly those with their families here.”
According to Colliers’ report, buying office space was also popular in the last quarter. Private and institutional investors waded back into the market looking to take advantage of predicted rental increases: an investment fund based in Singapore purchased Manulife Tower for HK$2.25 billion. Currently, Hong Kong trails only Tokyo in Asia-Pacific for per-square-foot office rental rates, hovering at just around $700 per square foot per year. That’s if a business can find any space to buy. “Grade A office new supply in the next three years will be largely coming from non-core business districts such as Kwun Tong and Kowloon Bay in Kowloon East,” Lo explains of dwindling stock.
So if Central is full, where’s everybody going — or where are they going to go? “Island East and Wanchai/Causeway Bay have seen their vacancy rates coming down continuously when companies start decentralising their operations,” Lo points out. “However, with vacant stock being gradually absorbed in [those districts] tenants have extended their searches to the Kowloon side. Kowloon East has become a hot spot for a range of financial services companies together with trading and logistics companies.”
Small and medium sized businesses that want to stay in Central, if for no other reason than having the right address on business cards, still have options too. “Small and medium companies engaged in financial industries can go for smaller office units in second-tier developments such as strata-titled buildings in CBDs,” suggests Lo. “Rentals are much cheaper at about HK$45-60 per square foot per month compared with prime buildings at HK$100 per month or above.”
It is the non-finance elements of the private sector that are expected to spur the next round of rental increases. For SMEs, a market that is increasing at a rate of 8 percent from quarter to quarter could be oppressive — 13 percent in Central. Price could be a moot point: like financial sector tenants, without new stock in prime locations, secondary locations are becoming increasingly vital. “Non-finance companies who are not location sensitive will have a lot of choices in decentralised locations such as Kowloon East where rentals are in the order of HK$20 per square foot per month,” Lo reiterates.
Overall vacancy rates are sitting at a miniscule 5 percent. That makes for a predicted growth of a whopping 20 percent over the next year. And if you think now’s the time to move to one of Hong Kong’s more off-the-beaten-path spots think again. As Colliers’ report summarised, “With the continued narrowing of the rental difference between Kowloon East and other sub-markets on Hong Kong Island, the pace of major relocations looks set to take a breather over the near term.” Translation: Moving office isn’t going to ease the rental burden.
Can Hong Kong’s major financial corridors expect any new supply any time soon? The situation isn’t dire yet according to Lo. “In Grade B section, there are a couple of new buildings due for completion in Central and Wanchai in the next three years.” In Central that includes Hongkong Land’s The Forum (40,000 square feet due in 2012), Luk Hoi Tong’s 31 Queen’s Road Central (178,000 square feet next year), a string of addresses on Connaught Road Central racking up 172,000 square feet, as well as Swire’s redevelopment of the Tai Sang Commercial Building (146,000 square feet) in Wanchai due in 2012. Ultimately, however, office seekers are staring down the barrel of the same supply/demand imbalance as home seekers. For the foreseeable future that 50th floor harbour-facing unit in something like IFC remains out of reach for almost every business — in more ways than one.
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