Demand for office leases slowing down

PUBLISHED : Wednesday, 23 November, 2011, 12:00am
UPDATED : Wednesday, 23 November, 2011, 12:00am


Property investor Lilian Chen did not believe demand for office space was slowing in Hong Kong until she tried to rent her unit in Admiralty and met only lukewarm response from prospective tenants.

Chen bought a 3,000 square foot office unit in the Lippo Centre in Admiralty two months ago and immediately offered it for lease.

'Many companies - from finance groups to mainland firms - came to take a look. But no one has made a serious offer yet. The unit is still vacant,' said Chen. 'It's totally unexpected. The unit is in Admiralty, a prime business area.'

Chen, who also has office properties in Kowloon Bay and Tsim Sha Tsui, had expected to find a tenant for the Admiralty office - which offers a sea view - very quickly.

'I have now reviewed the possible reasons for the lukewarm response, such as whether the unit may be too small, or whether it fails to fulfil present needs. Finally, I have concluded that the global economic uncertainty is the reason,' she said.

'When the outlook is unclear, occupiers do not want to make any moves. You need a home to live in, even in a bad market; but you do not necessarily need to rent an office since there are many alternatives, such as establishing a home office or using a virtual office.'

Chen also noticed that companies had started looking for cheaper locations, such as Kowloon East, where there was more choice and rents were lower.

Property consultants DTZ said that, faced with an economic slowdown and global uncertainty, tenants had been delaying their expansion and relocation plans.

'Rents in the financial core area of Sheung Wan/Central/Admiralty are particularly sensitive to economic conditions,' it said in a recently released report.

Average rents in these areas grew by a modest 0.8 per cent quarter on quarter in the three-month period that just ended, due to limited supply.

But according to another property consultant, CB Richard Ellis, on a month-on-month basis, average rents in Central were already down 1.09 per cent last month compared with September and now stood at about HK$120.24 per square foot.

Edward Farrelly, head of research for CB Richard Ellis in Hong Kong, said earlier that occupiers had been actively looking at options to keep costs under control and some were looking at locating their operations outside Central.

Despite a shortage of new office supply in Central over the next three years, property agencies and analysts diverge on their forecasts for the magnitude of a grade-A office rental decline next year.

Agencies were projecting a milder decrease of 8 per cent to 12 per cent and analysts were estimating a decline of 20 per cent to 30 per cent on the back of faltering leasing demand, said Lee Wee Liat, regional property head of research at Samsung Securities (Asia).

Simon Lo Wing-fai, executive director of research and advisory for Asia at international property consultant Colliers International, said there was presently a 'hot and cold' response from tenants in the overall office market. 'While the core Central area will be hit by the slowdown of the finance industry, demand for office space in other districts such as Causeway Bay and Kowloon East is not bad,' he said.

There was also no sign that other industries, such as distribution and manufacturing, had been hit by the European debt issue, Lo added.

CBRE said rents in Tsim Sha Tsui rose 2.9 per cent last month when compared with those in September, while Kowloon East rose 2.4 per cent in October compared with September. Causeway Bay saw a 0.2 per cent rise in October when compared with rents in the preceding month.

Jenny Lee, a director of a public relations company, said her company decided to move out of the core business area of Causeway Bay after the landlord raised her rent by 50 per cent.

Lee's company rented a 900 sq ft unit in McDonald's Building, next to Causeway Bay MTR station, at a price of HK$20 per sq ft a month in 2008 when the global financial crisis hit. As the market rebounded over the past few years, the going rate for rentals in the building had risen to HK$35 per sq ft.

When Lee's lease came up for renewal the company's landlord offered her a rate of HK$32 per sq ft and she successfully negotiated that down to HK$30 per sq ft for a one-year contract. But she anticipated rents in the building would continue to rise in the long run.

'Most of the floor spaces have been leased to tenants who can afford to pay higher rents, like beauty salons or employment agencies,' she said.

Lee's company signed a two-year contract to lease a similar-sized unit in Catic Plaza, about a five to 10-minute walk from McDonald's Building, at a rate of HK$24 per sq ft.

'Catic Plaza is a bit off the centre of Causeway Bay. In view of the likelihood that rents generally will soften in the coming years, the leasing agent suggested my company signed a two-year lease, rather than a three-year one,' she said.

In the final quarter of this year rental demand should turn sluggish, said DTZ, but the company did not expect to see a drastic correction in Central office rents, due to limited supply.

Chen, meanwhile, said she had no plans to significantly cut her asking rent of HK$55 for the Admiralty office unit. 'I prefer to leave it empty rather than slash the rent,' she said.