Serviced offices rise in popularity as demand for grade-A space wanes
As banking sector sheds staff, individuals are setting up their own businesses and seeking executive space to house their new operations
Peggy Sito and Yvonne Liu
The office sector in Hong Kong has been a tale of two markets, with leasing demand for grade-A office premises in prime business locations falling amid global financial turbulence, while demand for serviced office space has been rising.
The rise in demand for serviced offices has been driven by the demand from the finance sector, said Paul Salnikow, chairman & chief executive officer of The Executive Centre, an Asia provider of serviced office space with video conferencing facilities located throughout its network of 50 centres across 18 cities.
"The wave is currently ongoing, having begun about a year ago. The trend can be defined as bankers and financial services people leaving the big banks and becoming entrepreneurial by opening their own firms," said Salnikow.
As a result of the uncertain outlook for the global economy, many employers, especially those in the banking and finance sectors, were forced to downsize head counts and freeze budgets last year.
The Executive Centre's banking-related client base in Hong Kong rose to 51 per cent in January 2013 from 29.5 per cent in January 2010, he said.
In 2012 alone, more than 102 banking sector people set up shop in The Executive Centre.
"This trend is clearly set to continue, as big banks downsize but individual bankers refuse to leave the market. I recently got two calls from former bankers at Morgan Stanley and Credit Suisse," said Salnikow.
"The average size of the group that is coming across is six persons, and the groups are almost always former banking teams who are transferring over into Executive Centre space en masse."
Some big banks closed entire divisions, and their former staff remained together and set up independent operations, taking banking clients with them.
The Executive Centre operates from six locations in Hong Kong, mainly in Central and Admiralty. Addresses include Two Exchange Square, Wheelock House, Nexxus Building and Three Pacific Place. It plans to open more offices in the city.
Salnikow said the company had no plan to raise rents, despite the increased demand for space.
"We generally align our rates with the grade-A office market trends, so for 2013 we expect the rates that we charge to remain flat. Demand for our product is very high, with occupancy rates at or near 100 per cent, but we still need to be mindful of general market conditions."
Regus, a rival office provider, has 13 business centres in Hong Kong. A spokesman said two new centres would be added to its locations in the next two months.
"Whether we open more new business centres later in the year will depend on market demand," the spokesman said.
But outside of the serviced office sector, the grade-A office market is still suffering from the effects of slowing world economic growth, with financial institutions particularly vulnerable.
Denis Ma On-ping, director of Greater Pearl River Delta research at property consultant Jones Lang LaSalle, said the Central office market was still under downward pressure with low new demand for office space.
"We have seen some new set-ups by mainland companies and funds. But they are not looking for large office spaces. Units offering 10,000 square foot of space are already big for them. There is a lack of demand for large office space," he said.
Ma said he believed the situation would continue in the first half. "But we are optimistic for the second half, as we will then begin to see the impact of measures taken by countries to stimulate their economies."
The grade-A office leasing market was quiet in December and, according to a report by consultant Knight Frank, there were few headline-grabbing leasing deals, with most involving lease renewals or new leases on small premises.
Thomas Lam, head of research and consultancy of Greater China at Knight Frank said 2012 was "not the best year" for Hong Kong's office leasing market, particularly for Central, because the corporate sector was clouded by the global slowdown.
"While leasing demand needs more time to recover, we believe the downward pressure on Central rents will ease in 2013, after they fell 14.6 per cent in 2012," he said.
But an increasing number of office buildings in Central saw satisfactory take-up rates in the past few months, Lam added, and given tight future office supply in the district, he expected rents in the core business district would fall no more than 5 per cent this year.