Grade A office rents in Central remain under pressure as key tenants - mainly from the financial sector - continue to scale down operations. However, outside the core premium office market the outlook is not as bleak for well-diversified office and retail portfolios, says Sunlight Real Estate Investment Trust, a landlord focused on retail and office properties in non-core districts. Average asking rents for the 12 office buildings in Sunlight's portfolio dropped 10 to 15 per cent between the end of September last year and last month, but its eight retail properties showed a far more modest 5 per cent decline in rents over the same period, said Keith Wu Shiu-kee, the chief executive and executive director of Henderson Sunlight Asset Management - the manager of Sunlight Reit. The evidence suggests that in the non-core areas, rents seem to be finding a floor. Mr Wu said although leases were yet to be renewed at higher levels, there were a growing number of enquiries from prospective tenants looking to cut costs by moving out of Central. An example of this trend, he pointed out, was a hedge fund that set up an office in Sunlight's flagship office building at 248 Queen's Road East, which was on the fringes of the core grade A office market. 'Whether the market has reached its bottom will depend very much on the global economy and company results,' said Henderson Sunlight chairman Tony Tse Wai-chuen. 'The performance in the second quarter will provide directional guidance to the future market.' Both Mr Tse and Mr Wu believe the group's two flagship office buildings - 248 Queen's Road East in Wan Chai and Bonham Trade Centre in Sheung Wan - will continue to ride on the growing trend of decentralisation as perceptions about the costs of locating in the central business district change. The CBD, they say, is no longer confined to Central addresses but is expanding to neighbouring areas offering not only lower rents but also quality office spaces. According to property consultancy CB Richard Ellis, the average Central office rent was HK$84.06 per square foot in the first quarter, a decline of 20.1 per cent on the previous quarter. This compared with the average rents of HK$42.66 in Sheung Wan and HK$36.88 in Wan Chai. The average rents for office space in 248 Queen's Road East and Bonham Trade Centre stood at HK$23.90 and HK$16.20 as at the end of March. The two buildings offer 494,290 square feet of gross rentable area and account for more than half of Sunlight Reit's office portfolio. Its flagship retail project, Sheung Shui Centre Shopping Arcade, is also showing resilience in the economic downturn. Despite its relatively remote location in the New Territories, retail revenue showed a slight increase in the first quarter, thanks to its 'necessity mall' market position and cash-rich mainlanders coming to the city for shopping. 'Investors may have the perception that developers are holding high quality assets but spin off the inferior ones to reits, but I think we have to be really careful about the definition regarding the quality of assets,' Mr Wu said. He said that Sheung Shui Centre Shopping Arcade was an example and the latest relaxation allowing more freedom to Shenzhen residents to travel to Hong Kong had further raised the mall's growth potential and made it a good asset offering strong cash flow for the reit. By comparison, superior assets such as triple-A premises in Central might lend status to a reit without offering a reasonable yield to investors and rents might be more volatile than other properties, said Mr Tse. To further enhance the value of Sunlight Reit, HK$15 million had been earmarked for refurbishment of its flagship Sheung Shui mall, Mr Wu said. The first phase of the revamp is finished and the second phase is scheduled for completion by the end of the year. It will also spend more than HK$1 million on promotional campaigns - offering cash coupons and lucky draws - to boost sales in the malls in Sheung Sui and Metro City amid the economic downturn.