24 September 2012

District’s Grade A office rental still has room for growth

While various sub-markets took a beating with falling office rents due to heightened global uncertainty, the Kowloon office leasing market remained active driven by relocations. In particular, the Tsim Sha Tsui district bucked the trend with an average Grade A office rent over HK$35 per sq ft per month in September 2012, representing a premium of about 40% over that in Kowloon East and over 50% more than that in Kowloon West.

Amid worries on the slow U.S. recovery and debt woes across Europe which conspired to undermine market confidence, many have questioned if Tsim Sha Tsui – a traditional core business district in Kowloon which has seen 8% year-to-date growth for its Grade A office rents – will follow in the footsteps of some key office buildings across the harbour which have peaked out its rental before an adjustment can be seen.

“In general, market sentiment towards Kowloon is still positive; with demand for Grade A office space in core business districts relatively strong. While Kowloon East benefits from the governments’ redevelopment efforts, Tsim Sha Tsui is the undisputed leader in terms of popularity,” said Patrick Mak, Senior Director of Office Services, Kowloon at Colliers International. For as long as demand continues its red hot path, it is unlikely the Tsim Sha Tsui market will see any situations of rents hitting ceiling in the short term, explained Mak.

Cases in point illustrating the simmering Tsim Sha Tsui market are two recent benchmark transactions involving relocations to the district which were concluded by Colliers.

“The first transaction involved a Belgium-Dutch insurance company previously located at an office building on the East of Hong Kong Island who committed about 50,000 sq ft lease in Harbour City. The client was keen on upgrading its image and felt Tsim Sha Tsui was a good option given its proximity to Hong Kong Island and in the heart of the hustle and bustle of Kowloon,” said Mak.

“We also had an overseas supermarket chain that was looking to expand its operations and at the same time have a location upgrade from Kwun Tong. The client took an immediate liking to Miramar Tower and eventually leased approximately 50,000 sq ft of office space in that building. Due to the relatively large space requirement, they had to take up the premises phase by phase in order to secure the total floor space needed,” he added.

In terms of the office space committed, both transactions represent two of the largest relocations from other districts into Tsim Sha Tsui over the past three years with the last recorded transaction being the Sony Corporation move to Gateway.

Amid these sustained demand for Grade A office space in Tsim Sha Tsui, Mak is bullish on the short term rent increment for Tsim Sha Tsui and expects the trend to spillover to Kowloon East and West further boosting rental in those districts.

With QE3 in place, capital inflow to Hong Kong is expected which is likely to fuel inflationary pressure and eventually underpins property prices and rents. According to Colliers International, Tsim Sha Tsui Grade A office rental growth is expected to lead Hong Kong’s key office sub-markets in the second half of 2012 and is projected to see a total growth of 14% throughout the whole 2012. In the mid-to-long run, further growth of Tsim Sha Tsui office rents is likely to see challenges amidst potential increase of leasing supply in Kowloon, as some buildings in Kowloon East originally planned for strata-title sales may be changed to lease.

Myanmar