Office rental

Central office rents to stage rebound

Rents in other areas, especially Kowloon East, may come under pressure

PUBLISHED : Tuesday, 24 December, 2013, 2:01am
UPDATED : Saturday, 18 April, 2015, 5:21pm

Office rents in Central, which have underperformed those in other areas of the city in the past three years, will stage a recovery next year but at a moderate pace.

Rents in non-Central areas, especially in Kowloon East, on the other hand, may see downward pressure as a result of increased supply, say analysts.

Office rents in Central had just seen seven consecutive quarters of decline totalling 17 per cent and two subsequent quarters of consolidation, said Macquarie Equities Research. In the past 26 years, the average length of a rental decline cycle has been eight quarters.

Rents will continue to undergo a mild correction of 8 per cent in 2014

"[After the decline cycle], we believe Central office rents have bottomed out," Macquarie said in a report released on Friday.

The report forecast a 3 per cent gain in Central rents next year. Rents are expected to climb 2 per cent in Wan Chai and 3 per cent in Hong Kong East.

But rents would be flat in Kowloon East and even drop 2 per cent in Tsim Sha Tsui, Macquarie estimated.

In a research report, BNP Paribas cited an improving hiring outlook in the financial sector, a potential increase in initial public offering activities, growing demand from mainland companies and a trough in the rent gap with non-Central areas as factors that would help strengthen rents in Central.

"However, non-Central districts and fringe Central face multiple headwinds such as weakening hiring from non-financial sectors, rising Kowloon East vacancies, potential vacancy increases in some fringe Central buildings and surrendered supply from the International Commerce Centre," said Patrick Wong, the author of the BNP research report.

Gary Fok, executive director of Cushman & Wakefield's commercial division in Hong Kong, said a rise in new supply in Kowloon East generated by the completion of several buildings and more investors putting their units up for lease amid an inactive investment market had begun to put pressure on rents in the district.

"With leasing demand expected to remain soft, we anticipate rents will continue to undergo a mild correction of 8 per cent in 2014, with more supply in 2015 turning the market clearly in favour of tenants," said Fok.

In "greater Central", which includes core and fringe Central areas, leasing demand this year had been primarily driven by mainland companies, law firms and finance-related institutions that needed small to medium-sized offices amid the absence of demand for prime space from major financial firms, said Cushman & Wakefield.

Some real estate fund managers are more cautious about the office market in Central in the long run.

"Office rents in Central have become more affordable after the [autumn]," Victor Yeung, managing director of real estate fund management firm Admiral Investment, said yesterday.

But buildings in Central are mostly old. In the long run, big companies, even financial firms, would gradually move to Kowloon East in the wake of the government's efforts to turn the district into a second central business district, said Yeung.