Concrete Analysis
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Demand grows for offices in Hong Kong’s ‘second CBD’: Kowloon East

In April, Kowloon East accounted for 66.6 per cent of the new lettings in terms of floor area across Hong Kong. Its rental levels have advanced 1.4 per cent in the first four months

PUBLISHED : Tuesday, 12 June, 2018, 12:01pm
UPDATED : Thursday, 28 June, 2018, 8:14am

Two years ago, the commercial real estate market was seriously concerned by the wave of new supply about to hit Kowloon East.

What was commonly being referred to as “Core Business District 2” was at risk of significant rental drops as the market pondered how, and who would fill, the vast amount of supply in the district.

Fast forward to today and the rental growth in Kowloon East has bucked that expected sharp drop, and is well into growth territory.

The area’s office leasing market has been extremely active since early this year.

In April, Kowloon East accounted for 66.6 per cent of the new lettings in terms of floor area across Hong Kong. Its rental levels have advanced 1.4 per cent in the first four months.

In a typical leasing cycle, particularly when there are multiple completions in one district by various stakeholders, it could take 12 to 18 months to fill the office space.

As it stands, despite the myriad of ownership and completions, major portions of the new offices are being rented out as soon as occupation permits (OP) have been granted.

For example, the occupancy rate of Sun Hung Kai Properties’ Two Harbour Square has reached 90 per cent. Mapletree Bay Point in Kwun Tong has 60 per cent of its office space committed since obtaining its OP in April, while Hong Kong Pacific Tower’s occupation rate has reached over 50 per cent.

The strong demand for office space has boosted overall rents in the district.

Rents for new office buildings in the district, such as Mapletree Bay Point, Hong Kong Pacific Tower and Two Harbour Square have surged 30 per cent since the buildings were launched.

This supply peak has been smoothly absorbed by market demand, which has been driven by a blend of new to market entries (such as co-working operators), expanding and consolidating multinationals, along with demand coming from nearby Industrial office buildings.

The Quayside has achieved almost 50 per cent pre-commitment and is scheduled for completion in 2019.

Kowloon East grade A offices are increasingly desirable in a Hong Kong market that is uncomfortable of boasting that we have the highest rents in the world, albeit in Central
Adrian Tang, head of Kowloon Markets at JLL

Kowloon East grade A offices are increasingly desirable in a Hong Kong market that is uncomfortable of boasting that we have the highest rents in the world, albeit in Central.

Quite simply, Kowloon East offers significantly reduced rentals from most core markets, and a higher return for money in terms of building quality.

The new buildings come with globally benchmarked specifications and facilities and are erected on an average floor plate that is bigger than most districts can compete with.

Against this backdrop, we see the new supply in 2018 and 2019 receiving significant enquiries from the market.

Companies that were split into several levels of buildings now comfortably occupy entire floors spanning 25,000 to over 50,000 square feet.

These reasons are a major motivator for multinational construction and engineering consultancy firms, and back offices of international banks and insurance firms, who are increasingly drawn to the district.

Co-working operators also see the value and opportunity that lies in Kowloon East. From the end of 2017 to today, this district has seen strong demand from the sector, with many committing spaces ranging in size between 15,000 and 50,000 square feet.

WeWork, naked Hub and Tencent WeStart, which supports the digital entrepreneurs, have all opened operations. Co-working demand will continue to enhance the dynamic of the district in future.

The status of Kowloon East as a commercial and business district will only be enhanced through the development of the Kowloon Bay Action Area.

This area will connect the various pockets of prime offices along the Kowloon East Corridor from, Kwun Tong, Ngai Tau Kok, to Kowloon Bay.

There is no doubt that the 6.5-hectare area will look completely different in several years’ time. The government has expressed that the area will be turned into a vibrant hub featuring retail, entertainment, food and drink, office and hotels. The presence of upmarket hotels will add to the appeal of Kowloon East as a central business district.

Adrian Tang is the head of Kowloon Markets at JLL

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