As major internationals are forced out of the prime office districts, mainland firms are moving in. Andre Cooray reports
International companies, among the worst hit by the global financial crisis, have begun an exodus of sorts, as they uproot from their ritzy corporate locations in Central and Admiralty and head to cheaper decentralised districts either on Hong Kong Island or increasingly Kowloon side. Consequently, local landlords of Grade-A office spaces are looking to mainland companies to save the day: the big Chinese firms are seen as the only ones who can still afford to foot the bill.
In the third quarter of last year, a subsidiary of the Industrial and Commercial Bank of China, the mainland’s largest bank, Industrial and Commercial International Capital, took up two floors at Admirality’s Three Pacific Place. Around the same time, The Agricultural Bank of China, the mainland’s third biggest bank, rented premises at One Pacific Place. Landlords of Hong Kong’s commercial properties are expecting more mainland institutions to follow suit.
“We have noted a few mainland corporations looking to expand their office space. A few mainland banks have recently taken up between 10,000 square feet to 30,000 square feet which is quite a substantial amount,” says Ricky Lau, senior director of Savills Commercial Leasing in Hong Kong. Lau also expects mainland institutions to enlarge their existing frontline offices in Central and move their back offices to areas such as Kwun Tong and Kowloon Bay.
The average rent for office space in Central is HK$160 per square foot, compared to HK$22 per square foot in Kowloon East, a recent Knight Frank report shows. So despite its humble surroundings, the low rents in Kowloon East are likely to attract more companies opting to downgrade for the duration of the downturn.
Knight Frank notes that late last year, Carrefour, the French supermarket chain, moved from the China Resources Building in Wanchai to a 23,000 square-foot space in One Kowloon, Kowloon Bay. DB Schenker relocated from the same building in Wanchai to Kowloon Bay at a similar time, taking up 27,000 square foot at Skyline Tower. As did Henkel Asia Pacific, a consumer products manufacture, that moved from its Island Place corporate home in North Point to Landmark East in Kowloon Bay.
Office rents on Hong Kong Island are expected to drop between 5 percent and 25 percent across the-board in 2009 but there is still a limited supply of Grade-A office space close to Central and vacancies are at an all-time low. This means that landlords are hoping to hold out for tenants to pay their (albeit somewhat reduced) asking prices.
In a recent report, CB Richard Ellis (CBRE) also stresses that many tenants had previously renewed leases during a landlord-friendly market with significantly reduced surrender options. “Landlords in Central have also re-geared their anchor tenant leases, reducing their exposure during the next couple of years,” notes Rhodri James, executive director of Office Services, CBRE. Companies that signed these types of leases at that point in time are now assessing their options.
Knight Frank reports that many companies that are locked-in to top-dollar contracts are now seeking other tenants to share the costs. “An accounting firm successfully secured an investment fund to take up part of the floor spaces it occupied in Two International Finance Centre (IFC), in Central. Negotiations with other potential tenants to take up its remaining floor areas in the building were ongoing in late 2008.”
Further wheeling and dealing between tenants and landlords is expected over the next few months, as even the biggest players struggle to keep afloat financially. According to Knight Frank, tenants continue to seek out significantly reduced rents: a major commercial company is trying to strike a deal with Two IFC for one-and-a-half floors, a top investment bank is in discussion with Three Exchange Square over tenancy renewal, and a big global insurance agency is negotiating for 100,000 square feet of office space in Kowloon East.
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