Tipster says A grade space set to rebound
Office rents are set to rebound as market fundamentals are due to get a push from a reported expansion in the services sector of the economy.
In his first report since joining Salomon Brothers after a stretch with Nomura Research and S.G. Warburg, Michael Green reckons the grade A office rental has hit the bottom of the cycle. After more than two years in the doldrums, rentals are set to pick up in the last quarter of the year, continuing a trend through 1997 and 1998.
In the first quarter export services rose in real terms by 14.4 per cent and by 21.9 per cent in nominal terms, including the impact of inflation. Services imports rose by 7.6 per cent in real terms or 10.5 per cent in nominal terms. These figures represent the fastest level of real growth in more than a year.
This represents good news for the territory's office market. Export and import services are intensive users of office space. With this sector seeing buoyant growth office take-up should also pick up.
Private consumption is also improving so this should underpin the retail rental market.
Mr Green suggests the real rise in services exports has gone unnoticed by a lot of the property fraternity. He argues this is because many companies have been expanding their operations and work forces using office space they already lease out. As the trend continues and services activity rises excess space will be taken up and real demand will return to the market.
Rents are expected to be flat this year and rise by 10 per cent next and up to 17 per cent in 1998.
Even if monetary policy in the United States and Hong Kong hardens Mr Green argues demand for office space will remain buoyed by mainland activity in the territory.
Fears about oversupply in the sector are discounted by Mr Green.
A report earlier in the year from Asia Equity suggested oversupply was due to create an undertow on the office market with office values declining as much as 20 per cent in the year and rentals falling up to 7 per cent in the year.
New supply coming on in important areas would be at record levels, amounting to about 5.3 million square feet a year for the next three years. This supply would contain a high quantity of strata title, which is expected to create further downward pressure on rentals as a proliferation of owners of space scrap for tenants. The brokerage expected take-up from mainland China was going to be less than many bullish forecasts.
Mr Green argues that forecasts of office supply at the Hong Kong Government Rating and Valuation Department have always tended to overestimate actual supply.
Actual supply in 1994 was 21 per cent less than the Government forecast at the end of the previous year. The actual supply in 1995 was 59 per cent less than the Government's 1993 year end forecast and 25 per cent less than its 1994 year end forecast. The Government forecast for 1996 was at 5.15 million sq ft at the end of 1994 and 1.3 million sq ft at the end of last year. Forecast supply in 1997, at the end of 1995, was 4.4 million sq ft.
Salomon Brothers says Central, Wan Chai, Causeway Bay, North Point and Quarry Bay along with Tsim Sha Tsui supply in 1996 is expected at less than one million sq ft. In 1997 supply is expected to be 2.58 million sq ft in these key areas.
For a change, Mr Green is not a bull on the residential market. He says although fundamentals in the sector are sound, an expected slide in sales volume in both the new flat and secondary market is going to make it tough for property developers to maintain prices at present levels.