20 September 2012

Rents to rise 5% in 2013

Hong Kong’s Grade A office market, especially in the Central/Admiralty sub-market, has seen softening trends since mid-2011. However, recent signs of stabilisation reveal that the office market is set to regain growth momentum.

In Central/Admiralty, the Grade A office vacancy increased from 2.7% in Jan 2011 to the 8-year high level at 5.8% in March 2012. However, over the past 5 months, the Grade A office vacancy in the sub-market became stable and has hovered around 5.1% – 5.5%. Meanwhile, the Grade A office vacancy in Kowloon East, benefited from relocation demand, flattened at about 10% over the past 2 months after falling from 14.4% in June 2011.

The improving office vacancy rates in Central can be attributed to the solid occupational demand. “The Legal sector is growing steadily and most financial tenants opt for cost savings over cutting their headcounts dramatically. The Central sub-market also sees new-coming tenants from China-backed companies and finance-related industry which look for medium size units,” said Wendy Lau, Executive Director of Office Services at Colliers International Hong Kong.

“With a lack of stock for lease and narrowing rental difference between Central and the other sub-markets, a majority of existing tenants in Central prefer stay put to relocating out of Central,” added Lau.

On the rental front, Central/Admiralty Grade A office rents have also registered a downtrend. “Over the past twelve months, Central office rents have fallen the most notably by 13% compared to the other sub-markets. Due to relocation activity out of Central, occupational demands shifted to other key business hubs. This explains the relatively resilient Grade A office rents in the Wan Chai / Causeway Bay and North Point / Quarry Bay sub-markets, which continued to see a mild increase of 2% since mid-2011,” said Simon Lo, Executive Director of Research & Advisory, Asia at Colliers International.

Meanwhile, Grade A office rents in Kowloon East has gone up by 13% since May 2011. This has reduced the rental gap between Kowloon East and Island East, which was just a HK$7 per sq ft per month difference in August 2012. As the narrowing rental gap brings less significant benefit by moving to Kowloon East, the relocation demand has weakened recently and the average Grade A office rent of Kowloon East kept stable in August 2012.

“According to the past record of Grade A office rentals in Hong Kong, the recent trend has demonstrated shorter consolidation cycles, decreasing from 1.5 years or more in the past to merely 9 months in the last cycle,” explained Simon Lo, Executive Director of Research & Advisory, Asia at Colliers International.

“In addition, the job vacancy in FIRE (Finance, Insurance and Real Estate) industry, which is perceived as a leading factor signaling Grade A office rental trend, has already rebounded to positive growth in 1Q 2012. This supports a foreseeable return of positive growth in Grade A office rents,” added Lo.

With the solid demand stated above and limited supply, the average Grade A office rent in Central/Admiralty sees improving sign. Looking ahead, Central/Admiralty office rents are expected to pick up a growth of 5% in 2013, and accelerate to a 10% rise in 2014 to lead the other local office sub-markets.

For the overall Grade A office market, Colliers predicts rents to see a mild downward correction of 3% in the whole of 2012, with a rebound to 5% and 9% growth in 2013 and 2014 respectively.

Myanmar