Demand for Central offices rises as rents fall
After a stagnant start to the year, sentiment in the Hong Kong office sector has improved and momentum in the leasing market in the central business district is picking up.
'The rebound in activity is stronger than we expected,' said Simon Lo Wing-fai, executive director of research and advisory in Asia of Colliers International.
Lo said demand for Central offices may have reached a positive turning point. 'The market seems to be coming in for support after rentals declined 10 per cent since the beginning of the year,' said Lo.
Colliers expected rentals in Central to drop 20 per cent this year but their outlook changed after better than expected demand for office space from non-finance-related sectors. Lo said some mid-sized multinational companies took advantage of a decline in rentals to move to the core office district.
'There is evidence to suggest that some occupiers have switched their focus from obtaining lower rents to securing quality space,' said Edward Farrelly, Head of Research for Hong Kong, Macau and Taiwan for CBRE.
Despite uncertainty over the European debt crisis and a lack of supply, take-up of space in Central/Admiralty was positive in the second quarter, at 5,707 square feet, compared with a drop 291,194 square feet between January and March, according to DTZ.
Many smaller floor plates, or space at lower rents, proved attractive to tenants, DTZ said, and transactions in secondary locations in Central/Admiralty were relatively robust in the second quarter. Moreover, despite fewer initial public offerings by mainland companies, those who had already settled in Hong Kong continued to expand and support office take-up, it said.
According to DTZ, average rents in Central/Admiralty fell from HK$120 per square foot in the fourth quarter of 2011 to HK$107 per square foot in the second quarter of this year.
The most prestigious office towers, such as the International Financial Centre, Chater House and AIG Tower, experienced a bigger decline in rents, falling 15 per cent from HK$154 per square foot to HK$131 per square foot over the same period. The latter figure is down 22 per cent from the market's peak of HK$168 per square foot four years ago.
Landlords of grade A buildings appear unwilling to cut rents below HK$160 per square foot but some hard-bargaining tenants succeeded in securing contracts at about HK$130 per square foot.
Lo said landlords were unlikely to cut rents further owing to limited supply. Office rents in Central would probably stop falling in the current quarter, then stabilise.
However, Farrelly said: 'Uncertainty over the European debt crisis coupled with an anticipated slowdown in the mainland, where the China market will encourage a drive for cost efficiency, are all likely to impact negatively on rents in Central over the next six months.'