24 November 2014
The prolonged low interest rate environment since the outbreak of the global financial crisis in 2008 has drawn more office occupiers to acquire their own premises, according to Colliers International’s latest research report - Office Sales in Kowloon: The Next Big Boom? Colliers foresees the Hong Kong market to be active as buyers take advantage of the low cost of debt to compete for prime real estate.
“Multinational enterprises with strong cash flow and purchasing power, such as banks and insurance companies, who opt to consolidate their operations under one roof can benefit through operational efficiencies, potential rental savings and also certainty of future occupancy costs and tenure as a long-term occupier,” Joanne Lee, Manager of Research and Advisory Services at Colliers International Hong Kong, says. “These companies and small-to-medium sized enterprises are the key demand drivers in the market for self-use office purchases.”
“Some banks have been buying the entire office buildings for their own use. In 2012, Agricultural Bank of China acquired 50 Connaught Road in Central and China Construction Bank snapped up 18 Kowloon East, intending to consolidate their operations in one building. The recent acquisition by Citi of East Tower, One Bay East echoes the trend,” says Fiona Ngan, General Manager, Office Services, Kowloon.
The report mentioned that multinational insurance companies have become a force in the strengthening market for office acquisitions. These companies have taken up about 1.8 million sq ft of Grade A office space across the territory. This demand emerged only when Manulife acquired the West Tower of One Bay East for HK$4.5 billion in 2013.
These cost-sensitive tenants are looking to relocate from core business districts to less central areas like Island East or Kowloon East, which provide better returns, have more modest rental volatility and are preferred locations in view of risk management. However, the narrowing rental gap between core and decentralised districts means that rental savings may not justify the costs of relocation and these insurance companies are widely assessing the feasibility of purchasing for owner-occupation as a long term strategic move.
Given the limited availability of buildings with large floor plates, Kowloon East will continue to attract demand from tenants with sizable office space requirements, as well as those who are cost sensitive.
With fit-out and renovation costs going through the roof each year, sales momentum in Kowloon East will pick up gradually. Despite slowing activity in the rental market, office sales transactions in the owner-occupier pool have doubled since 2013. Colliers’ statistics reveal that the proportion of sales transactions (above 8,000 sq ft gross floor area) that are for owner occupation has grown substantially, from 17% in 2012 to 62% in 2014.
Rising fit-out and relocation costs was highlighted as the major driving force and as such, Colliers believes that, increasingly, many tenants are becoming buyers and eventually owners as they tend to prefer to buy the space for their own use rather relocating every few years. With supply tightening in the next few years, it will be no surprise to see a bull run in overall office sales transactions in 2015.