The city's office sector could be in danger of pricing itself out of the market, consultants say The cost competitiveness of Hong Kong has drawn fresh attention from tenants and property consultants as office and retail rents are starting to rise. Although rents had not reached alarming levels, their continued rise could slow the expansion pace of multinational companies in Hong Kong, or oblige them to look elsewhere in Asia and across the border, consultants warned. Spurred by an improved economy and limited supply, the city's occupancy cost ranking rose for the first time since the end of 2002. As office rents surged 16 per cent in the first half, Hong Kong's occupancy cost ranking rose to 24 from 31 in the second half of last year, according to an upcoming report by property consultant CB Richard Ellis (CBRE). Total occupancy costs in Hong Kong in the first half of the year stood at US$48.39 per square foot per annum, up 14.2 per cent from the second half of last year. Total occupancy costs include base rent and other occupancy-related expenses such as service charges or management fees, and property taxes. The rising trend could continue because new supply was limited, property specialists said. Simon Wong Sau-chuen, associate director of CBRE, said office rents would rise another 5 per cent in the second half. Jason Cruz, associate director of property consultant Cushman & Wakefield, said: 'There is very little supply in Central from now to 2008. The vacancy rate in Central fell from 26 per cent to 28 per cent at the beginning of this year to the current 16 to 18 per cent.' The major new supply is Three Pacific Place and the AIG Tower. Two IFC's office space is about 90 per cent leased. 'So this time next year, the situation will be quite different. Rentals will become more expensive,' Mr Cruz said. Mr Cruz said Hong Kong should be careful to monitor the rising rental trend, to avoid returning to the days when multinational companies complained about the rising occupancy costs in the city. In 1998, Hong Kong was ranked the third most-expensive city in the world in which to rent office accommodation. Exchange Square commanded a monthly rental of more than $100 per square foot when the office market peaked in 1994, about three times that of the current average rent of core Central office space. But Mr Cruz said that, historically, Hong Kong's occupancy costs remained low and did not immediately threaten its attractiveness for businesses. International retailers expressed concern about the rising trend of shop rents. Germany's major plush toy maker NICI opened its first store - in Harbour City in Tsim Sha Tsui - at the end of last year. NICI Asia-Pacific sales manager Yolly Mae Chan said: 'Rents of shops in prime areas have surged more than 30 per cent from the beginning of this year. Accommodation costs are becoming more expensive.' Recently, the company opened its second store - an area of less than 400 sqft in the basement of Times Square in Causeway Bay - for which it was paying more than $250 per square foot per month. The company plans to open 10 stores in Hong Kong in three years. But Ms Chan said the pace of the company's expansion would be subject to rising rents. It would continue to expand in Hong Kong in view of the robust retail sales in the city, but she preferred to lease a small space to help lower costs. Retail sales grew 19.7 per cent to $16.5 billion in May due to the boom in mainland tourists, according to the government. 'Hong Kong is a place we cannot miss to build our presence. Once we establish our brand in the city, we will not see any problem of making a name in China,' she said.