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Office for Rent
Hong Kong expects greater demand in commercial leasing
| Text : Alex Frew McMillan | Photo : www.thinkstockphotos.com |
Hong Kong still has the most expensive office space in the world, according to a new report, even if commercial property prices haven’t enjoyed the same sudden spurt as the city’s private property. Rents look set to rise over the rest of the year, too, meaning this may be the right time for companies to renegotiate a lease.
The market has been on a bit of a roller-coaster ride. Rents plunged 22.4 percent from the end of 2008 to mid-2009, then swept upwards again from the middle of last year, gaining 16.7 percent during the last six months of the year. That left them averaging US$161.14 per square foot per month at the end of 2009.
That places Hong Kong atop a roster of 154 office markets around the world, according to Colliers International, which pegs London’s West End in second place at US$139.43 per month, followed by Tokyo, the City of London and, somewhat improbably, Rio de Janeiro.
Brazil is flavour of the month among larger developing nations, so perhaps that explains Rio’s rise. Recovery in the financial sector accounted for the sudden turnaround in Hong Kong office rents in the second half of last year.
“With the incoming of new hedge funds and private equities [managers], the demand for Grade A office space picked up at a faster-than-expected pace during recent months,” says Simon Lo, the director of research and advisory at Colliers. “During the current recovery cycle, CBD took the lead due to limited supply in both new and secondary stock.”
Lo forecasts that Grade A office rents will increase 12 percent in the next twelve months, pushed higher by increasing demand from occupiers.
It’s taken some time for the turnaround to take hold. Landlords had their asking prices beaten down dramatically in the aftermath of the financial crisis.
But the city’s economic prospects are now back on a solid footing, and very little new space coming on the market in high-demand areas such as Central. So commercial real estate may be shifting its stance from a renter or buyer’s market back in favour of office-building owners.
Hong Kong is at the leading edge of the commercial-property cycle, according to
Colliers, together with places such as Chengdu. Like Hong Kong, that Chinese city has very little new supply of office space in the city centre, meaning rents recover quicker than places where there is abundant new supply.
Asia-wide rents fell one percent in the last three months of last year, and haven’t quite yet turned the corner from declines to gains. Across Asia, “the pace of growth in expansionary floor area requirements has yet to catch up with the sales market,” says George McKay, the managing director of corporate services in Asia for Colliers International, said. “Office occupiers remained largely cautious about any significant capital expenditure.”
The details of the forecast are a little different at rival brokerage CB Richard Ellis, anticipates gains of five percent for the whole year. But the direction is the same.
This year, “Hong Kong will see healthy demand for office space on the back of improving economic conditions both locally and abroad,” CBRE said in its look-ahead for the year. “In light of the improving business environment in Hong Kong, more multinational companies are returning and looking to expand, a trend which may stimulate the market.”
Real-estate market watchers agree that the pace of gains in office rents is likely to pick up as the year goes on.
“Rents are expected to remain relatively flat in the first half due to large pockets of vacancy in Central, Causeway Bay and Hong Kong East, as several large occupiers will be exiting these districts,” CBRE explains.
In Central, vacancy rates rose from 1.9 percent in July 2008, shortly before the height of the financial crisis, to 5.6 percent as of the end of last year, according to the brokerage’s figures.
Tenants that could relocate away from Central and other high-rent neighbourhoods have been drawn to areas such as Kowloon Bay and Kwun Tong, where there’s a large amount of new commercial space coming on the market. Buildings’ owners have scrambled to offer incentives to draw tenants, and rents that are as low as HK$12 per square foot. Still, vacancy rates in Kowloon East stood at 18.5 percent at the end of last year.
Investors have been much more aggressive than companies looking to rent, likely attracted by prices that have been knocked down from their pre-financial crisis peaks. The total turnover of real-estate investment deals inked in the last three months of 2009 was more than double – up 115 percent — over the rate in the middle of the year, to US$8.8 billion in greater China.
“Greater China was the key contributor to the upsurge in market volume during the second half of 2009, despite a number of measures implemented by the central government to curb speculative purchases,” Piers Brunner, the CEO for Asia at Colliers, says. “Meanwhile, cash-rich investors can opt to keep property assets in their portfolio for recurring income.”
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