Quantitative Easing

'Grimmest days over' for Hong Kong's office leasing market

Demand for space tipped to rise over the year as the global economy finds surer footing. Top-tier rents projected to rise by about 5 per cent

PUBLISHED : Wednesday, 02 January, 2013, 12:00am
UPDATED : Wednesday, 02 January, 2013, 4:24am

After a sharp fall in rentals in the core Central district, the worst for Hong Kong's office leasing market is over, property consultants say.

They expect demand to pick up gradually amid growing expectations that the global economy will stabilise this year.

The office market was grim during the first half of last year, after the decline in the global economy in late 2011 forced many companies to put a stop to their expansion plans, property consultancy DTZ said.

The overall take-up in the city last year, at 381,376 square feet, was only about a third of total net absorption in 2011.

"The office leasing market was hit hardest in the first half [of 2012], as many investment banks had to downsize, freeze their budgets for expansion or cut operating costs by relocating to non-core areas," said Alva To Yu-hung, DTZ's head of consulting for North Asia.

"But the worst is over."

In the fourth quarter, overall office rentals in Central dropped 13.1 per cent from a year ago to HK$104 per square foot, with top-notch buildings, such as Two IFC atop Hong Kong Station, tumbling 17.5 per cent to HK$127 per square foot.

"The AAA-grade buildings in Central recorded the biggest fall of all the districts," he said.

Looking ahead, To forecast rentals in Central will remain flat or ease by up to 5 per cent this year. But he predicts rentals in areas outside Central, such as Kowloon East, will grow by 5 per cent as they continue to benefit from decentralisation.

"Kowloon East will transform from an old industrial area into the city's new business district, and we expect to see a growing number of companies relocating their offices there," he said.

Jones Lang LaSalle said the contraction of demand in Central led to the vacancy rate climbing from 3.6 per cent in 2011 to 4.9 per cent last year, the highest among the five major office sub-markets.

In contrast, the vacancy rate in Kowloon East declined sharply, supported by an active investment sales market dominated by owner-occupier buyers.

At the end of November, the overall vacancy rate in the market had tightened from 4.2 per cent in 2011 to 3.6 per cent.

"The latest indicators suggest that the economic situation in 2013 will stabilise," said Ben Dickinson, head of markets at Jones Lang LaSalle.

"Coupled with the release of the third round of quantitative easing, we expect leasing demand to gradually pick up over the next 12 months."

Although about 1.5 million sq ft of new supply is expected to reach the market this year, most of this is destined for the strata-titled sales market.

"Therefore, we do not expect new supply to have a significant impact on the performance of the rental market, and we estimate a broad-based recovery in the rental market by the second half," Dickinson said.

"We expect grade A office rents, supported by a low-vacancy environment, to grow by about 5 per cent in 2013."