HK office market faces double hit

Subprime pain, abundant supply likely to affect rental segment, consultants warn

Hong Kong's robust office rental market could take a delayed double hit from an Asian fallout from the United States subprime mortgage debacle and an abundance of new supply coming on to the market in decentralised areas, property consultants warn.

'On the surface, it still appears to be a calm sea. But there could be a swirling current beneath,' said a consultant who asked not to be named.

'There are already noises in the market that some investment banks will consider holding off their expansion plans in Hong Kong or Asia, even though they have not taken any action so far.'

Demand for grade A office space in Hong Kong has long been driven by the needs of finance, insurance, real estate and other professional services tenants, with hedge funds and investment banks being the principal sources of expansion amid the boom that got under way in the equities market last year.

As head-counts in the financial sector jumped, demand for extra space drove office rents in Central to fresh highs, reaching a record of more than HK$160 per square foot.

In the first half of this year, office rents in Hong Kong rose 19 per cent, on top of a 27.8 per cent increase last year, said Alva To, the head of consultancy at DTZ's North Asia division.

That supercharged performance has raised concerns among some analysts that rents may have overrisen and are now ripe for a correction in the risk-averse market that has developed from the subprime credit concern.

Simon Lo, the head of Colliers International's research department, said: 'There is no evidence yet that the market has been affected by the subprime debacle.

'But history teaches us that such global issues will affect the ups and downs of the financial sector. And that may eventually affect the demand for office space.

'This is an issue of leverage. The number of new funds expands rapidly as firms get high leverage from banks.

'But the question is, when banks begin to put a squeeze on credit, will the funds' expansion contract?'

Nicholas Brooke, the chairman of Professional Property Services, said: 'On the office front, I think there could be some pain as most of the financial institutions appear to be caught up one way or another in the subprime debacle.

'However, I sense that many are going to want to draw attention away from that involvement and will want to create stories of growth, success and activity, and where better to counter any negative publicity than here in Asia?'

Savills, CB Richard Ellis and DTZ all agreed that the subprime issue could affect the demand for office space in Hong Kong.

However, they said it was impossible to quantify the impact. While a clearer picture was likely to emerge next year, the immediate outlook appeared to be good, they said.

Chris Marriott, Savills commercial leasing senior director, said if the subprime issue was to have an impact, it would not be immediate. 'The whole Asian office market, including Hong Kong, will be robust over the next 12 months,' he said, citing continued strong demand.

Mr Lo, however, said in the medium term, office rents in Hong Kong could reach a cyclical peak.

'From now until the middle of next year, we will witness a turning point. The market must be softening,' he said.

On the demand side, potential tenants had begun to resist the rapid rent escalations of the past few years, and on the supply side, a large stock of office space in decentralised areas would slow the market's growth, consultants said.

According to Jones Lang LaSalle, more than 4.4 million sq ft of office space will be available in the market, including 900,000 sq ft at phase one of the 118-storey International Commerce Centre in West Kowloon. What will be Hong Kong's tallest building has attracted key investment banking tenants.

Last month, Morgan Stanley announced that it would move to ICC from Exchange Square in Central by the end of next year. Other investment banks such as Deutsche Bank and Credit Suisse are in talks with Sun Hung Kai Properties on leasing floors in the building.