• Tue
  • Jul 29, 2014
  • Updated: 7:41am
Concrete Analysis
PUBLISHED : Wednesday, 10 October, 2012, 12:00am
UPDATED : Wednesday, 10 October, 2012, 3:00am

Looking farther afield

Lack of space on Hong Kong Island, plus high prices, means Hung Hom has suddenly appeared on the radar as a key business area

In recent years, Hong Kong has been identified as the most expensive office market in the world due to high rents in Central. However, Central rents have fallen by over 16 per cent since the peak of the market in 2011 and vacancies have shot up during this time.

Currently, one-third of all available space in Hong Kong is to be found in Central, and a number of occupiers have taken advantage of vacancies in the best buildings to satisfy their requirements.

However, at a time when a growing number of companies have become more cost conscious, the lack of space in decentralised areas is acute. Unfortunately for occupiers seeking cost-efficient space, the situation is not improving.

A recent study by CBRE sheds some light on the lack of options facings occupiers. Of the entire grade A office stock in the Hong Kong market, the number of premises with vacant space of more than 25,000 square feet has fallen only recently to just 19 buildings. Almost all of these are located on Hong Kong Island, particularly in the most expensive areas.

For example, 10 of these buildings can be found in Central. Unsurprisingly then, but of concern to occupiers, is the fact there is only one grade A office building in the whole Hong Kong office market with more than 25,000 sq ft currently available to lease at an average price of less than HK$50 per sq ft per month.

The Kowloon side has seen vacancy rates whittled down steadily across its various submarkets. Vacancy rates in both Tsim Sha Tsui and Kowloon East, both key destinations for office occupiers, are currently below 2 per cent.

It is not only the larger, decentralised office hubs such as Tsim Sha Tsui or Kowloon East that have attracted occupier interest. A lack of space, together with high prices, had led some occupiers to pursue alternative strategies. Occupiers are considering areas not often associated with grade-A offices but are also seriously looking at purchasing office space. We expect occupiers to continue to expand their horizons and to consider alternative locations, particularly those which are likely to experience some material or structural change that may benefit the commercial fabric of an area.

This may involve the addition of modern office stock, the enhancement of existing services and complementary business activities, or the improvement and expansion of the communication infrastructure.

With much of the focus around the large developments in Kowloon East, West Kowloon, and Island East, a lot of activity in Hung Hom has gone under the radar, so to speak.

This area is set to experience great changes over the coming years with major improvements set for the business area, much of it driven by infrastructure improvements.

The new MTR East-West extension is scheduled to link Kai Tak and the future CBD2 with Hung Hom by 2018 and then Central by 2020, giving the area an enviable position between two of the major office hubs in Hong Kong.

This will undoubtedly make Hung Hom a key mid-town location in the office market.

However, market movements over the last number of quarters have shown that Hung Hom has already started to generate an elevated level of interest among office occupiers.

This has fed into significant rental growth, to the tune of 14 per cent year to date in 2012 and over 25 per cent year on year.

This makes Hung Hom the fastest growing rental market in Hong Kong.

The interest in Hung Hom is not exclusive to the office letting market.

Of the 31 sites auctioned by the Hong Kong government last year, five were located in the area and accounted for 21 per cent of the maximum allowed gross floor area (GFA) among all the sites auctioned in 2011.

In addition, investment deals totalling almost HK$750 million have been completed this year in Hung Hom.

All of this means we are likely to continue to see interest in Hung Hom intensify going forward, particularly when new developments become more tangible.

This is a key issue for a number of reasons. Firstly, the market views an office location as it is, and not as it will be, and therefore may not see all the potential, until progress on infrastructure becomes more visible.

Furthermore, deliverability is crucial for occupiers moving to new developments, particularly in locations which are undergoing great changes.

Experience of other global markets has shown us that infrastructure drives development and Hung Hom will lie at the heart of an expanded MTR rail network. Occupier attention will naturally shift towards grade A offices located in this area.

Rhodri James is an executive director, of CBRE's office services division

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