London's West End has assumed Hong Kong's mantle as the world's most expensive place to lease an office, after rents in Central fell sharply last year as a result of the global economic downturn, which put a stop to the expansion plans of many financial institutions.
A study by Cushman & Wakefield found that the average annual occupancy cost for a grade A office space in Hong Kong - which includes rent, management fees and property tax - dropped 24.6 per cent year on year to US$184 per square foot per year, making it the second-most expensive in the world.
"In the last 12 months, we saw office demand in Central experience a slowdown, resulting in a sizeable rental decline," said John Siu, an executive director of Cushman & Wakefield. "Demand fell because of the restructuring among banking and financial institutions, which led to office space reduction."
Siu said office rents would continue coming under downward pressure this year because of "slightly elevated availability".
Excluding management fees and taxes, the average office rent in Central was HK$98 per square foot per month in the last quarter of last year, and will drop a further 10 per cent to HK$88 per square foot this year.
Siu said the rental market would recover next year, given limited supply in the core office district of Central, which would have only 200,000 to 300,000 sq ft of new supply.
Cushman found that London's West End now ranked as the world's priciest office district, as occupancy costs rose 9.6 per cent to US$262 per square foot per year. The Zona Sul area of Rio de Janeiro climbed from eighth-most expensive office location to third, after a 43 per cent rental increase from 2011.
Globally, prime office rents rose an average of 3 per cent last year, but this was largely driven by the impressive levels of growth in South America, particularly Brazil and Colombia.
The report surveyed 137 locations in 63 countries, ranking each location based on occupancy costs in a year.
Edward Farrelly, a director of CB Richard Ellis Research, said the drive to reduce costs in the finance sector would continue.
"We expect Central to suffer from renewed, but limited, downward pressure on rents through 2013. Through 2014 we are likely to see an improvement and beyond this a rebound could be very strong and provide the platform for rental growth over the coming years," Farrelly said.