Office rents in Hong Kong's Central could fall by 20pc over 18 months

Office rents in Central may fall by up to 20 per cent within the next 18 months as the market adjusts to an abundant supply of vacant space in Hong Kong's prime commercial precinct, say some property brokers.

An exodus of tenants to outlying commercial districts where rents are up to 50 per cent lower, combined with a contraction in demand for office space from the banking and finance sector, has left more than one million square feet of grade-A space unlet in the city's core business district, they say.

Mark Bernard, managing director at OfficeAsia TCN Worldwide, which focuses on office leasing, expects grade-A office rents could tumble by 20 per cent over the next 18 months considering the large amount of space available on the market. Many small hedge funds that were formerly able to pay high rents have since been forced by the global financial crisis to close their offices, said Bernard.

"Some office floors in premium grade-A office buildings in Central have remained empty for more than a year because landlords have been reluctant to cut rents," Bernard said.

Denis Ma, local director for Greater Pearl River Delta research at property consultancy and brokerage Jones Lang LaSalle, agreed that a large amount of space remained unlet in Central, but questioned whether this would lead to further big falls in rents since he expected demand could return given the major correction in rents that has already been seen.

Although there was an estimated 1.1 million sq ft of unlet office space, the situation was not as bad as it was in 1998 and in 2003, said Ma.

"In 1998 there was 3.4 million sq ft of office space available for rent, and in 2003 there was some 2.5 million sq ft available," he said. The vacancies in 1998 were aggravated by the Asian financial crisis, and those of 2003 by the release of new office supply in the Two IFC project.

Central tenants have been lured to alternative office accommodation in Causeway Bay and Quarry Bay, where rental agreements are being transacted at rents that are half to two-thirds of Central rents, said agents.

Gary Fok, executive director and head of commercial department at international property consultant Cushman & Wakefield, said the take-up of office space in new lease agreements in Central fell to 174,000 sq ft in the third quarter of this year from 399,000 sq ft in the previous quarter. "The available leasing space now left in the market is equivalent to two-thirds of the space in Two IFC," he said.

The adjustment had changed the profile of the rental market in Central, added Fok. Medium-sized companies that signed up for 5,000 to 7,000 sq ft of space now dominate new lease agreements, whereas banks and financial institutions previously rented tens of thousands of square feet.

Landlords are bracing for the possibility that vacancy rates in Central could spike if Champion Real Estate Investment Trust fails to renew leases with two major tenants.

It is in talks with Citibank and ICBC, which are anchor tenants of Citibank Tower and ICBC Tower, as their leases are due for renewal in October next year.

Average effective office rents in Central were down 23 per cent from the previous peak of HK$125.70 per sq ft two years earlier, at HK$96.70 per sq ft in the third quarter, according to data from Cushman & Wakefield.

Ma at Jones Lang LaSalle said he did not expect further "significant" corrections in Central because rents had already fallen sharply and the vacancies were confined to a few buildings.