More demand for space will boost rents in commercial, retail and industrial areas THE ROBUST LEASING market is gathering further momentum on an improving economy and expanding business, with office property tipped as the star performer this year. Property consultants forecast rents in all sectors from office and retail, to residential and industrial, would continue to rally due to increasing demand for space. Kenneth Tsang, head of research for Greater China at Jones Lang LaSalle, said office space had been in greater demand with more than 500,000 sqft taken up by companies since the start of the year. He expected prime office rents to increase 30 to 35 per cent this year after last year's 45 per cent surge as multinationals, including financial, insurance and trading companies, continued to look for space. He said companies were now using office space in a more cost-efficient and productive manner which, with continuing demand and lack of supply, would underpin sustained rental growth. Mr Tsang said only 494,000 sqft of grade-A office space would be completed this year while supply would reach 822,000 sqft next year and 1.44 million sqft in 2007. On the retail property market, he forecast rental would rise by 20 to 25 per cent this year and rents for shops in fringe areas, which had lagged behind, could grow at a stronger pace. Mr Tsang said luxury residential leasing would be helped by the influx of expatriates, companies' raising their staff housing budgets and limited supply. He expected luxury rents to jump 25 per cent this year. Simon Lo, director of research and consultancy at Colliers International, said luxury rents had already picked up 3 per cent in the first three months and would rise by 15 per cent for the full year. He was more optimistic about the office sector because of a shortage of quality space, strong investment interest, company expansion and expectations of rising housing budgets. Grade-A office rents had gained 12 per cent in the first quarter and the increase for the full year would reach 40 per cent, he said. According to CB Richard Ellis, average grade-A office rents are now $25 per sqft a month on a net area basis, still far below the previous peaks of $35.70 in 2001 and $54 in 1997. Nigel Smith, CB Richard Ellis executive director of office services for Asia, said prime office space would be the star performer in the property leasing market this year and rents would increase 35 per cent. Growth momentum would continue to be led by core Central buildings in which rents had increased the sharpest in the market recovery, he said. Companies were looking at their long-term office requirements and were keen to restructure lease terms to cope with future needs, he said. Alan Lok, CB Richard Ellis senior director of office services for Hong Kong, said companies were particularly interested in prime offices in Central, where rents could outperform other districts and rise by 40 to 50 per cent this year. He said some companies might be forced to consider leasing offices in decentralised locations if they could not find suitable space in core business areas. The only new grade-A supply in Central this year is AIG Tower, which has attracted an encouraging leasing response. In the first quarter of this year, prime office rents rose 19 per cent in core Central, 23 per cent in Admiralty and 7 per cent in Wan Chai and Causeway Bay, CB Richard Ellis said. The consultant forecast prime retail rents to increase 25 per cent this year. Industrial leasing activity had also improved with rents expected to grow 20 per cent this year. Knight Frank said grade-A office rents had recovered to an average of $24.63 per sqft a month after a 15-month rally, 63 per cent higher compared with the end of 2003. Knight Frank research manager Benedict Ma said the majority of the office take-up over the past 12 to 18 months had come from the banking and finance sectors and, to a lesser extent, the legal and accounting industries. 'Many of these companies took advantage of low market rents to upgrade and consolidate their operations in newer and better quality premises,' he said. Besides Central and other core districts on Hong Kong Island, Tsim Sha Tsui's office market had also benefited from strong take-up from companies related to manufacturing and trading, and finance and insurance companies' back-office operations, he said. He predicted a 35 per cent rise in grade-A office rents this year on the back of an improving economy. The vacancy rate for grade-A offices stood at 9.1 per cent last month, down from 9.6 per cent at the end of last year and 12.5 per cent at the end of 2003, he said. Vacancy is lowest in Central at 8.1 per cent last month.