Demand drives prices up
The local office market has performed robustly this year with strong leasing activity. However, occupiers' sentiment appears to have weakened, with more economic woes in Europe and the United States.
Leasing activities have slowed in the past couple of months on low vacancy rates and a lack of office space was partly to blame for the reduction in take-up. But landlords are still positive about sustained demand for prime offices.
Dave Siu Wing-koon, general manager (office leasing) at Harbour City Estates, says the office occupancy rate in the Harbour City complex has increased to 97 per cent from 95 per cent at the start of the year. Asking rents are as high as HK$40 per square foot a month for its office buildings in Canton Road and up to HK$60 per square foot for Gateway Towers.
'We have seen strong leasing activities with particularly solid in-house expansion demand from companies occupying our office premises,' he says. 'New commitments from our existing tenants include AIA taking an extra 18,000 sqft and Huawei leasing one more floor with us.'
Siu says office rents in Tsim Sha Tsui are attractive and office premises in Harbour City stand out as choice properties for companies, with the continuous appeal of the office-hotel-shopping integrated portfolio in the complex and further improvement in transport infrastructure in Tsim Sha Tsui. He expects to see brisk leasing activity and rents rise steadily, albeit slower than the first half of this year.
Lawrence H.P. Law, associate director of Sino Land, says the group has witnessed sustained demand for office spaces and rentals have increased by about 10 per cent from a year ago. The demand has boosted occupancy rates to above 95 per cent for its buildings in different districts. Some of the new leases included AXA taking up 72,000 sqft and Guess leasing 18,500 sqft in China Hong Kong City. Skyline Tower saw a take-up of another 34,000 sqft.
'Tenants have been expanding in-house or relocating to cater to their expansion plans. [Plans to decentralise] continue, driven by the tight supply in core areas, as well as the high-quality offerings in non-traditional areas, such as Kowloon Bay, that offers a cost-effective and increasingly attractive option for occupiers,' Law says. 'We expect the buoyant office leasing market to continue into the next year on the back of the market fundamentals, tight vacancy and limited new supply.'
Simon Lo Wing-fai, executive director of research and advisory for Asia at Colliers International, says grade-A office rental in Hong Kong has increased by 15 per cent this year. The pace of rental growth has tapered off since the second quarter due to concerns about global economic growth.
'Rentals for the top-tier office buildings in Central are expected to soften,' he says. 'Tenants in Central have chosen to relocate [to] cheaper buildings in the same location or other business districts on Hong Kong Island. Although supply remains tight, the downside of the market is the potential surplus space arising from lease surrenders, if the global economic situation worsens. Grade-A office rentals are predicted to fall 8 per cent in the next 12 months.'
Colliers says 414 Kwun Tong Road and LHT Tower are the two major grade-A office developments due for completion in the next 12 months. Lo also says grade-A rental yields have been flat at 3.1 per cent since the beginning of the year, but grade-B yield yields saw a compression of 30 basis points to 3.2 per cent, reflecting the shift of capital to second-tier office assets. Present yields of 3 per cent are not attractive to investors.
According to DTZ, rents in Central and Admiralty grew 0.8 per cent in the third quarter to HK$125 per square foot per month, while Kowloon East recorded no change in rentals at an average of HK$31 per square foot. Rents in Sheung Wan rose 3.4 per cent to HK$61 per square foot. Monthly rentals in Wan Chai and Causeway Bay increased by 2 per cent to HK$50 per square foot and Island East by 2.6 per cent to HK$39 per square foot. Tsim Sha Tsui's rentals jumped 2.9 per cent to HK$35 per square foot.
