7 February 2013
According to Hong Kong Office Market Research & Forecast Report 4Q 2012 recently released by Colliers International, the market saw improving signs including increasing enquiries and falling vacancy, which marked the dawn of rebound in 2013.
As the employment market noticed slower contraction in Finance, Insurance and Real Estate (FIRE) sector’s job vacancies, an increase in office leasing enquiries was observed in 4Q 2012. Particularly, tenants in the legal and finance sectors were active in office leasing enquiries in Central and typically requested offices with size ranging from 3,000 to 5,000 sq ft, while individual tenants had their requirements up to 10,000 sq ft. This helped to drive the notable jump of Central net take-up from negative 69,790 sq ft in 3Q 2012 to 29,535 in 4Q 2012.
One of the remarkable leasing transactions in Central in 4Q 2012 included the lease of seven floors, comprising 150,000 sq ft, in Cheung Kong Centre by Bank of America Merrill Lynch, which will relocate from Citibank Plaza starting from September 2013.
Overall, the net take-up in the Grade A office market increased to 372,000 sq ft in 4Q 2012 from 111,000 sq ft in the previous quarter. The major drive of the increment comes from Kowloon East. With China Construction Bank’s take-up of 257,597 sq ft office spaces at 18 Kowloon East for self-occupation and a new round of expansions in the shipping / logistics sectors, net-take up in Kowloon East leapt by 176% quarter-on-quarter (QoQ) to 333,727 sq ft in 4Q 2012.
Meanwhile, the overall vacancy rate dropped from 4.7% in 3Q 2012 to 4.3% in 4Q 2012. Vacancy levels in Central, Island East, Sheung Wan and Kowloon East continued its downward trend, except Tsim Sha Tsui and Wan Chai / Causeway Bay where cost-sensitive tenants moved away from theses two districts and thus led to rising vacancy there.
Regardless of increasing take-up, the overall Grade A office rents recorded a downward adjustment of 2.3% QoQ in 4Q 2012. This was largely due to softening demand for premium Grade A office space in Central, as tenants could not justify the wide gap between premium rents and their budgets. Following a slight rise of 0.8% in 3Q 2012, Central Grade A office rents dropped by 5.7% QoQ in 4Q 2012.
In contrast, Island East benefited from relocation demand and experienced the strongest rental growth of 4.8% QoQ in 4Q 2012 amongst the key office districts, followed by Kowloon East which saw a rental increase of 4.3% QoQ due to the trend of decentralisation.
Since the government introduced more tightening measures in the residential market in late October 2012, many investors opt to park their money in the commercial properties. As a result, the office sales market registered an outstanding performance at the end of 2012. The total value of office sales transactions with a total considerations of HK$30 million or above increased significantly by 111% QoQ to HK$14.9 billion.
“Real estate funds, local private equities and overseas investors became increasingly active in 4Q 2012,” said Simon Lo, Executive Director of Research & Advisory, Asia at Colliers International. “Institutional investors previously bounded by limited loan-to-value ratios were more liberal in looking at other financing options such as mezzanine loans.”
Also Lo noticed that local developers took the opportunity to dispose of their commercial investment assets in non-core business areas so as to spur their profits amid a slow residential sales market. For example, notable sales transactions of en-bloc office buildings in decentralised office districts in 4Q 2012 included the sale of Stanhope House in Quarry Bay, the commercial building at 169 Electric Road in North Point, etc.
Meanwhile, strata-title office sales transactions were active in Kowloon East, with the government’s intention to transform the district into a major decentralised office hub which will come with various infrastructure enhancements.
Recent signs of increasing office leasing activities show that the overall office market is set to regain growth momentum. In 2013, the overall Grade A office rent is projected to rebound by 4%. In particular, Central and Kowloon East are expected to outperform slightly compared to the overall market. Similarly, the office sales market is anticipated to see a positive year and strong buying interest given that the tightening policy measures on the residential market are still in place.