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Prime office rentals could contract 10 per cent in the second half of the year following a 14 per cent decline in the first half, according to CB Richard Ellis.

The international property consultant estimated that grade-A office prices fell 19 per cent while the vacancy rate rose from 9.6 per cent to 10.7 per cent over the past six months.

Jones Lang LaSalle said office rentals shrank 17 per cent in the first half, while capital value fell 15 per cent.

Significant increases in vacancies in Central to 14.9 per cent last month from 10.8 per cent in December and in Island East to 12.7 per cent from 8.7 per cent over the same period had contributed to an overall escalation in vacancies to 11.1 per cent from 9.1 per cent.

The real-estate services provider estimated grade-A office supply this year totalled 3.21 million square feet in net area, with 45 per cent coming from Two International Finance Centre in Central.

The supply would be reduced to about 2.02 million square feet next year and 667,550 square feet in 2005.

With rents returning to pre-1990 levels, the leasing market had seen a slight increase in lease negotiations and relocation activities, said Nigel Smith, CB Richard Ellis executive director of commercial leasing services.

Given the abundant new supply of office space, landlords are expected to continue to offer favourable leasing terms to retain tenants, a trend that will continue to put downward pressure on rents, he added.

Mr Smith predicted office rentals could fall another 10 per cent and prices would soften by 3 per cent in the second half.

DTZ Debenham Tie Leung North Asia executive director David Watt said overall effective office rentals had plummeted 20 per cent in the first half, in response to favourable leasing packages from landlords.

Average effective monthly rentals in Central in the second quarter slid 12 per cent to HK$22 per square foot of net area, Mr Watt said.

Colliers International research director Simon Lo said the vacancy rate could soar to a record high of 20 per cent in Central by the end of the year.

He expected office demand to recover next year, when new supply would reduce substantially.

This would slow down the decline in rentals, he said.

The uncertainties resulting from the war in Iraq and the Sars outbreak had hit other property sectors hard in the first half.

CB Richard Ellis estimated that mass residential value depreciated 11 per cent, while luxury residential prices fell 10.1 per cent.

It forecast that prices and rentals for luxury residential properties would come down another 5 per cent in the second half.

Retail rentals in prime locations dived 4.1 per cent. The firm expected retail rentals to stabilise in prime shopping areas, while those in secondary areas could dip by 5 per cent to 10 per cent later this year.

Rentals for industrial offices dipped 8.2 per cent, and factory rentals dropped 7.9 per cent. Warehouse rentals rose slightly by 1.6 per cent in the first half. CB Richard Ellis expected overall industrial rentals to drop 5 per cent and prices to fall by 8 per cent in the coming six months.

The investment market contracted substantially, with 16 properties worth more than HK$100 million changing hands in the first half, contributing to a total of HK$3.64 billion, according to CB Richard Ellis.

Transactions tumbled 57 per cent year-on-year in terms of value, and 30 per cent in terms of volume.

Henry Lam, CB Richard Ellis executive director of investment properties, said an increasing number of foreign investors had shifted their investment strategies to focus on retail properties because these offered higher yields.

He expected future investment transactions to focus mainly on grade-B offices and retail shops in prime locations, given their higher yield and availability for sale.

Jones Lang LaSalle recorded a 14 per cent drop in prices in the mass residential market in the first half.

Luxury residential rentals went down 12 per cent, while prices fell 6 per cent.

Jones Lang LaSalle predicted that mass residential prices could drop 20 to 25 per cent this year, while luxury residential prices and rentals could decrease by 16 per cent and 22 per cent respectively.

Prices for street shops in prime areas plunged 10 per cent, while rentals decreased 9 per cent.

Rentals in prime shopping centres declined 6 per cent and those in decentralised areas came down 8 per cent.

Graphic: TREND9gsp



Office rentals face further downward slide