Tight new supply and firm demand for premium offices drive rates up in business hub while other areas suffer a decline The polarisation of Hong Kong's office rents has been accelerating, with grade A offices in core Central continuously hitting record highs and rents in decentralised business areas softening. Faced with tightening new supply and strong demand for office space from financial firms, landlords of Two International Financial Centre (Two IFC) at Hong Kong Station have received a leasing offer at a face rent of HK$135 per square foot a month - a new record in Hong Kong's office leasing history. The offer was received shortly after the landlords leased a unit at an effective rent of HK$129 per square foot in the third quarter, then a record high. Effective rents usually exclude rent-free periods and other incentives, but agents do not expect much significant incentives from Central office landlords due to overwhelming demand. Sources said the landlords of the skyscraper have received a lease offer of a face rent of HK$135 per square foot for a 4,500 sq ft office space on a high floor. 'It is not yet a done deal, they are still negotiating,' a source said, adding the landlords have rejected a lease offer of a face rent of HK$130 per square foot last month. IFC is owned by a consortium led by Sun Hung Kai Properties and Henderson Land Development. 'The limited office spaces at Two IFC are under negotiation with several financial institutions,' the source said. 'The face rent will hit HK$138 shortly.' Victor Lui Ting, an executive director of Sun Hung Kai Real Estate Agency, did not confirm whether the landlord-consortium received the bid, but he is optimistic about office rental movement in Central as numerous financial institutions expand. However, it is a different story in non-core business areas including Causeway Bay, Wan Chai, Tsim Sha Tsui and Quarry Bay, where office rents are softening this quarter. The asking rents at One Kowloon in Kowloon Bay and Millennium City in Kwun Tong have fallen 5 per cent, according to property agents. Meanwhile, Sino Land and Henderson have increased the commission of property agents for some of their offices in Tsim Sha Tsui, sources said. Property agents said effective rents for offices including those at Hysan Development's Lee Gardens in Causeway Bay have fallen 5 to 6 per cent in the past few months. Office rents are from HK$30 to HK$38 a square foot. A Hysan spokeswoman would not comment. Rents at Two IFC continue to rise this quarter while the vacancy rate at the office tower is below 1 per cent, according to DTZ Debenham Tie Leung's research. As Central is the core business district of Hong Kong, grade A offices in the area are welcomed by the financial sector, which has a high affordability. The average office rent in Central increased to HK$75 per square foot last month, agents said. Occupancy costs in Hong Kong, including rents and outgoings such as maintenance, jumped 35.3 per cent in the 12 months to September to US$116.25 a square foot a year, a recent study by the consultancy showed. The city was ranked the fifth most expensive office site in the world. But offices in other business districts are facing a downward pressure, hit by abundant new supply in non-core districts, property analysts said. New office supply totalling 10.5 million sq ft will come on stream from now until 2010, Colliers International said. Most of the supply will be in east Kowloon and the 118-storey International Commerce Centre (ICC) opening next year at Kowloon Station. 'Financial institutions have to stay in Central, but offices in Causeway Bay and Wan Chai cannot attract particular business industries,' said Alan Lok, a senior director of office services at CB Richard Ellis. Property agents said offices in Causeway Bay, Wan Chai and Tsim Sha Tsui suffered the most in the weakening office market. 'Financial institutions would move their back offices to Island East rather than Causeway Bay as rents in Island East are much lower than in Central,' the agents said. 'Wharf (Holdings) has advanced the negotiations for lease renewal with major tenants to face competition from ICC, developed by Sun Hung Kai Properties.' Alva To Yu-hung, a director of research at DTZ Debenham Tie Leung, said: 'Office rents in Central will continue to increase in the first half of next year and stabilise in the second half. Rents will rise at least 10 per cent next year.' He expects office rents in other districts to drop slightly next year.