Smaller businesses boost HK rental market

Over recent months there has been an increasing pattern of deals done that have taken up an average of 7,000 sq ft, lifting the sector

PUBLISHED : Wednesday, 29 August, 2012, 12:00am
UPDATED : Wednesday, 29 August, 2012, 2:31am

Leasing activity in Central's office market has become active in recent months, thanks to increasing demand from medium-sized institutions.

However, property agents are divided about whether this means rents may be bottoming out.

"There were more transactions in recent months because office rents were falling," said Alan Lok, executive director of office services for property consultancy CB Richard Ellis.

Lok said the vacancy rate for top grade-A offices was high, and history showed that even though vacancy rates were high, demand remained strong and floor space that was vacated would quickly be taken up.

But he said demand was weak as financial institutions had suffered the most from the euro-zone debt crisis and its impact on the global economy.

Now most leasing transactions were being done in small and medium-sized office units, according to agents, who cited the examples of Pine River Capital Management, which leased a 5,700 square foot unit at Two International Finance Centre (Two IFC); East West Bank, which leased a 8,000 sqft unit in the same building this month; and a mainland bank that took a 14,000 sqft unit on the same floor for their office in Hong Kong.

Luxury brand Chanel leased the 10th floor of the Hong Kong Club Building in Central this month. It already occupies three office floors in the building and adds 8,600 sqft on the 10th floor for further expansion.

The bank and Chanel were unavailable for comment.

Gary Fok, senior director at valuer's Cushman & Wakefield, said 15 leasing deals for a total office space of 113,000 sqft were recorded in the second quarter.

"The average take-up was only 7,000 sqft, which shows that most deals were for small and medium-sized units," Fok said. "Landlords are under pressure as the major tenants in Central - banking and financial institutions - have no plans to expand and there is a lack of newcomers wanting to set up office in town."

Given the absence of solid demand, he expects rents will continue to fall, and it "may be higher than our firm's expectation of 18 per cent".

Lok said landlords could become aggressive in competing for tenants if vacancy rates of their office buildings was high. "and rents would then be negotiable". He also believed Central rents would continue to fall due to the global economic outlook and rising vacancy rates.

However, Simon Lo, executive director of research and advisory at property consultancy Colliers International, believes rents have bottomed out.

"We expected that rents would drop 15 to 20 per cent this year when we made our forecast at the end of last year," Lo said. "But we found that rents have turned stable since falling 5 per cent in the first five months of the year and climbing 1 per cent in July. The improvement came earlier than we expected."

As a result, Colliers revised its forecast and now believes rents will rise by 4 per cent from August to December.

Lo said demand had come from financial institutions that were looking to relocate to save costs, as well as newcomers and non-financial institutions.

"Demand from foreign companies wanting to set up offices here has also increased."

The vacancy rate of Central's office sector improved to 4.8 per cent this month from 5.8 per cent in February.