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Kenneth Ko

Strong leasing activity pushed up rents for office properties during the year, while the sales market remained subdued.

 Rental increases outpaced the growth of capital values, making investment returns for prime office premises more attractive.

 But the substantial increase in supply in coming years is putting a dampener on the investment climate.

 The recent financial turmoil in Asia has sparked fears of slowing economies and contracting in business growth which could eventually affect the take-up of office space.

 C.Y. Leung & Co director Terrance Chow said it was too early to say demand for offices would be dampened by the financial crisis.

 'It will take a longer time to see the real impact,' he said.

 'At the moment, many companies are still looking for quality space for expansion.'  For instance, leasing for such new buildings as Citic Pacific's DCH Commercial Centre in Quarry Bay and Henderson Land Development's Newton Tower in North Point received good tenant response, he said.

 In Central, the southwest tower of the new MTR station had also attracted a lot of interest.

 Mr Chow said there was strong end-user demand, especially among large-sized companies.

 He expected that the office leasing market would continue to fare better next year but the sales sector would remain sluggish as a result of rising supply.

 This year, bigger transactions included Xinhua news agency's $1.72 billion acquisition of the Pearl Orient Centre in Wan Chai and China Merchant Group's $1.36 billion purchase of four floors in Shun Tak Centre, Sheung Wan.

 Standard Chartered Bank recently announced its $1.3 billion purchase of a new office tower in Kwun Tong from Sun Hung Kai Properties.

 Office prices, especially those in prime buildings, edged up 10 per cent or so in the middle of the year.

 But the recent financial turmoil dealt a blow to investing interest and forced prices down.

 The leasing market, supported by strong end-user demand, recorded a 5 to 10 per cent increase in rental this year.

 According to the Rating and Valuation Department, supply of grade A offices next year is expected to reach 5.38 million square feet, compared with 3.7 million sq ft this year.

 Last year, completions were 1.4 million sq ft - 52 per cent below the five-year average of 2.9 million sq ft between 1991-95.

 Overall supply of all grade offices was forecast at 5.2 million sq ft this year, and expected to rise to 7.4 million sq ft next year.

 Projects due for completion next year include Cheung Kong (Holdings') The Centre in Central, Citic Pacific's DCH Commercial Centre, Sino Land Co's joint venture Olympian City at the airport railway's Olympic Station and Swire Properties' Lincoln House in Quarry Bay.

 Others coming on stream are Hutchison Whampoa's Hilton Hotel redevelopment in Central and Swire's Oxford House in Quarry Bay.

 Next year will also see Hongkong Land vacate Swire House in Central and push ahead with plans to tear down the building for redevelopment.

 Cushman Wakefield director John Siu said the office leasing market for next year would remain stable, though subject to the local economic performance.

 The large supply of new space would not necessarily hurt the market but stimulate transactions and activity, he said.

 'New offices are usually of high quality and hi-tech features which meet many users' needs,' he said.

 'However, the prospect for older buildings will be less promising as their attractiveness declines accordingly.'  Simon Chow, director of Cushman Wakefield, said the sales market had been supported substantially by capital from the mainland this year.

 But part of the mainland funds had been diverted to speculative buying in the stock market and office property prices had decreased steadily on reduced transactions, he said.

 With a rising supply, decentralised office properties would be hit harder as competition increased, he said.

 High interest rates, low inflation and a slowdown in the economy are likely to discourage capital investment in the office sector unless prices are adjusted to more attractive levels.

 Much attention will be on the public auction of a 142,084-sq-ft office site on Tamar Basin, next to the Citic Tower.

 The sale, scheduled for March, will serve as the latest gauge of confidence in the office sector and a barometer for prices.



Strong leasing demand lifts office rents in the face of falling sales