|
End of the office party
Landlords looking to lease office space at inflated prices now have their work cut out for them, says Alex Frew McMillan
"While tenants are looking forward to inking new office leases at bargain-basement prices (even in Central), landlords are clearly less well placed"
The cataclysm on Wall Street is causing real-estate analysts who were previously bullish on Hong Kong property to have a major rethink. Although property prices haven’t yet dipped that far in Hong Kong, many people believe they have. Perception can become reality, and the likelihood of further falls is scaring buyers away.
“Prices haven’t really fallen that much yet, they have held up pretty well,” says Aaron Fischer, the Head of Asian Property Research at CLSA Asia-Pacific Markets. “But the next move is certainly down in terms of prices.”
There’s also no doubt that the financial sector will take a Typhoon 10, full-frontal hit. Wall Street was already expected to shed 11,000 finance jobs, with another 20,000 going in the City of London, even before Lehman Brothers went bankrupt and Merrill Lynch ran into the arms of Bank of America.
Asia is expected to be more resilient - China, Southeast Asia and even long-term laggard Japan seem positively sunny compared to the gloom in the Western world - but won’t be spared the pain.
“Hiring expectations are down sharply in Hong Kong as well, and there is a high correlation between hiring and office space rents,” Fischer says.
Lower headcounts, coupled with some new space coming onto the market outside Central, may finally correct the trend of rapid rent increase for office space.
Office rents in Hong Kong are up an eye-popping 503 percent since their SARS-induced lows in June 2003, according to CLSA data. In fact the three months through June marked the twentieth consecutive quarter of rent increases, an unprecedented run for Hong Kong that dates back to 2003. But the surge from knocked-down prices to record rates now looks like it cannot be sustained.
Jones Lang LaSalle (JLL) is forecasting that office rents in Hong Kong will still post an overall rise of 10 percent this year. But they’re due to show no gains in Central, site of the highest rent hikes.
The picture gets much worse next year, when JLL predicts rents will fall 15 percent to 20 percent overall, and by as much as 30 percent in Central. The reason? Fewer investment bankers crowding into a small number of buildings.
Rents in Central had reached a premium of as much as 140 percent over the next-most-popular areas: Causeway Bay, Wanchai and Tsim Sha Tsui. Slightly further out, North Point and Quarry Bay offered the next biggest supply of Grade A offices and the appeal, again, was the price differential. Eventually even the investment banks started to get the message that they ought to look elsewhere to get the space they need.
“We have been quite public in saying that for office space, there is a lot of supply coming on that is going to change the supply-demand equation for Hong Kong,” Richard Pyvis, the Executive Chairman of CLSA Capital Partners, said at the recent CLSA Investors’ Forum in the Hong Kong Convention and Exhibition Centre. Pyvis was suggesting that rents were heading down and the balance of power shifting away from landlords and back toward tenants. And the backdrop could not have been more opportune - he gestured to the International Commercial Centre (ICC) gradually growing its mirrored skin on the other side of Victoria Harbour, in West Kowloon.
The ICC has 2.5 million square feet of office space for leasing, compared with 1.95 million square feet in Two International Finance Centre (IFC). Colliers has previously estimated that tenants are inking deals at HK$35 to HK$40 per square foot per month in the ICC, compared with HK$180 per square foot per month in Central.
In 2009, the biggest addition of new office space will be in Kowloon East, where DTZ predicts more than 6.2 million square feet will come on stream in Kwun Tong and Kowloon Bay. Last quarter, rents there were about one-fifth the rate they were in Central, and the new projects were being marketed towards small firms and back-office operations.
While tenants are looking forward to inking new office leases at bargain-basement prices (even in Central), landlords are clearly less well placed. CLSA Capital Partners, which has around US$2.5 billion in assets under management as the alternative-investment arm of CLSA Asia-Pacific Markets, divested most of its real-estate portfolio late last year and early this year.
“I wouldn’t want a big real-estate portfolio at the moment,” Pyvis said. CLSA Capital Partners is sitting on a war chest of cash, including US$100 million of its Fudo Capital fund’s US$440 million in assets - money the company anticipates waiting to deploy until well into next year.
Pyvis, who first moved to Asia as a student in Japan in the 1970s, says he would not be looking at commercial real estate in Hong Kong and instead is focusing on Japan, where the first signs of inflation in two decades suggest real estate may rally.
“In Japan, the price of a can of beer has gone up for first time since probably 1989 - that’s my McDonald’s index,” Pyvis said. “It has gone from ¥210 (HK$16) to ¥225, so inflation is coming along. That is going to flow into the real economy, into real estate and the real values that we’re seeing.”
CLSA Capital Partners is also considering real-estate deals with developers in both China and India, markets it has not yet entered. It is avoiding Singapore, which already seems to be slipping into recession.
While the expected downturn in the region is dramatic, it is not unheralded. “I think the climate going forward is going to be not unlike after the 1997 correction and certainly after the ‘87 correction,” Pyvis said. “I would like to think that in Asia it is going be less serious, but I don’t know.”
Click here for local property listings
|
