Rental market reawakens

Companies are taking up space in the office sector at a faster pace as the economy strengthens, while demand in the luxury residential sector is holding steady

Arecovering economy and renewed demand have lifted sentiment in the office leasing market, prompting landlords to cut incentives and raise effective rents.

In stark contrast to the pessimism of a year ago, confidence is being restored and many companies are taking up space at a faster pace.

Central has led other districts in a revival in the office rental market in recent months, with demand especially strong for newly completed buildings.

FPDSavills deputy managing director Chris Marriott said the rebound in Central had been driven by demand in the financial services sectors and from China-related investment, trading and consumer goods companies.

'As Central rents rise faster than the rest of the market we would expect the ripple effect to be felt by the other business districts,' he said.

There were also signs of users of smaller space coming from across the border and international operations basing their headquarters in Hong Kong to take advantage of the China boom.

Grade-A office rents have risen by 20 per cent since October, with the vacancy rate at 12 per cent, according to FPDSavills. Rent-free periods have been reduced in new leasing agreements, thus increasing effective rents.

In the luxury residential leasing sector, rents for apartments on Hong Kong Island remained flat and the vacancy rate was about 11 per cent.

Edina Wong, head of residential leasing services at FPDSavills, said demand had been healthy, especially for larger units and town houses. Vacancies of such properties on The Peak and in Southside were extremely low.

The revival of activities in the residential sales market had prompted many owners to withdraw their properties from the leasing market, reducing the supply of stock, she said.

Chesterton Petty said demand from expatriates for luxury apartments had remained constant.

Monthly rentals in the sector had crept up by a marginal 0.26 of a percentage point in the past three months to $21.36 per square foot in February.

Ms Wong said the luxury leasing market was supported by a wide spectrum of tenants, especially corporates looking to establish or expand their presence in the mainland.

She forecast a rise of 10 per cent to 15 per cent in luxury rents this year.

The more promising economic outlook has encouraged landlords in both the luxury residential and office sectors to raise their asking rents.

On office demand, some property consultants said a few financial institutions were taking up more space for possible expansion but upgrading and consolidation activities remain dominant.

Nelson Wong, head of research for Greater China at Jones Lang LaSalle, said there was little evidence of new office expansion, which would equate to an increase in demand.

Most relocation activities were to capitalise on the attractive rental packages on offer.

By and large, companies remained cautious about engaging capital expenditure, he said.

Central saw the strongest rebound in office take-up, but rents in other sub-markets remained relatively sticky.

The movement to Central had created vacancies in these sub-markets, which, to a degree, were filled by upgrades from lower-grade buildings or industrial properties.

'On a positive note, business outlooks for this year are generally more positive and more companies are planning to increase headcount,' Mr Wong said.

The banking and finance sector would benefit from a high level of initial public offerings, which would also create considerable opportunities for a wide range of professional services including legal, accounting and valuation.

'Mainland Chinese companies have long been seen as a potential source of demand. Given the number of listed Chinese enterprises in Hong Kong, their presence is disproportionately low,' he said.

He expected demand for offices would strengthen this year, driven by a wide spectrum of industries and business sectors.

'Companies that have made expansion plans are beginning to execute them. This will first be reflected in the increased headcount, subsequently it will filter through to requiring more space,' he said.

'There will be a lag and therefore we expect a solid demand in the latter part of 2004,' he said. 'We expect office rents to rise in 2004 by an average of 25 per cent to 30 per cent. While the office market in general is influenced by the economy, the rental trend in each sub-market will be determined by its own district characteristics, tenant and building profiles and demand-supply dynamics.

'Buildings of superior quality will continue to be sought after.'

In Tsim Sha Tsui, the office leasing market has been more active with rents stable, according to Jones Lang LaSalle.

As rents in sub-markets on Hong Kong Island had fallen over the past three years, the rental market in Tsim Sha Tsui had emerged as much more resilient, the consultant said.

Typical tenants in Tsim Sha Tsui were companies with manufacturing facilities in southern China. These included trading companies and marketing or representative offices of international brands for garments, toys and industrial and consumer products.