Euro-zone woes set to erode office rents in Central
The retail property sector may be booming, but the outlook for grade-A office rents in Central is bleaker, with analysts predicting global uncertainty triggered by the euro-zone sovereign debt crisis to push rentals down in the second half as corporates migrate to cheaper areas of Hong Kong.
A Cushman and Wakefield study found that grade A office rents in the greater Central area - spanning Sheung Wan, Central and Admiralty - dropped 1.5 per cent quarter-on-quarter, 'a slight recovery' after dropping more than 9 per cent in the first quarter.
Cushman and Wakefield executive director John Siu expected rents in greater Central to fall by up to 10 per cent in the second half, saying the fall could be bigger if the euro-zone crisis worsens.
Siu said demand for bigger areas - those of more than 20,000 sq ft - remained weak in greater Central, and companies were still trying to save on rent, reflecting 'sustained conservatism among banking and finance tenants' because of Europe.
Thomas Lam, head of Greater China research at property consultant Knight Frank, also predicted that rents in Central would drop 5 per cent in the second half. Lam said many offices in Central had been occupied by investment banks and other financial institutions, some of which decided to move to cheaper districts during the first half.
Vacant office space in Central stands at an estimated 800,000 to 900,000 square feet, but new demand remains weak because multinationals are also limiting expansion in Hong Kong due to global uncertainty.
Cushman and Wakefield's study showed that the broader office market experienced a 'substantial demand rebound' during the second quarter, with a surge of more than 80 per cent in new leases, in terms of area, and a more than 50 per cent rise in the number of new leases.
Siu expected office rents to 'increase mildly' from 3 to 5 per cent in the second half - but not in Central. He forecast a 10 per cent rise in Kowloon East, where more than 241,000 sq ft of new leases had been transacted in the second quarter. 'These transactions are testament to recent activity in Kowloon East, but also show that office availability and costs are major concerns for office tenants in Hong Kong,' Siu said.
But Siu said government plans to build another central business district in Kowloon East, the so-called CBD2, 'will not shake Central's position'. 'Central is Central. Establishing offices in Central is a matter of image, especially for multinational banks,' Siu said.
The CBD2 project will provide a total of 5.8 million square metres of office space - double the size of Central - in an area that includes Kwun Tong, Kowloon Bay and the old Kai Tak airport site. It is part of former chief executive Donald Tsang Yam-kuen's plans to expand the supply of office space and maintaining Hong Kong's competitiveness. But Lam said it would take at least a decade for the district to be fully developed due to a lack of supporting facilities.
John Davies, CBRE's executive director of office services, said Kowloon East's importance as a key new area should not be underestimated, but the two districts 'are not devised to, and will not, compete'.
'Central will remain Hong Kong's core business district and companies who need to be there will remain there,' Davies said.