Overall Grade A office rents projected to grow 7% in the next 12 months
15 May 2013
According to Colliers International’s Hong Kong Office Market Research & Forecast Report 1Q 2013, overall office rents were generally flat in 1Q 2013 while rents in Central fell by 1.2% quarter-on-quarter (QoQ).
“Individual landlords of top-tier buildings reduced their asking rents notably because they anticipate an increase of backfill space in Central as tenants relocate,” says Simon Lo, Executive Director of Research & Advisory, Asia at Colliers International.
“However, their attitude has become more positive recently as major tenants have chosen to stay put in Central. Coupled with the limited amount of new stock in the pipeline in the district, asking rents have increased again recently.”
Lo mentions that most tenants chose to renew their leases as very few options are available for lease in the marketplace. Such situation is expected to sustain through 2013, in view of less than 1 million sq ft of total new supply scheduled for completion this year – 35% less than the historical average of 2.2 million sq ft.
On the demand side, there were no signs of massive real estate requirements consolidations or lease surrenders in the banking & financial services sector. It remained segmented in 1Q 2013, which some individual finance companies aggressively took up office spaces while some continued to stay put.
Meanwhile, on the supply side of the leasing market, Lo noticed that Kowloon saw more office spaces listed for lease during 1Q 2013. As the sales transaction volume in Kowloon’s office market contracted considerably following the introduction of double stamp duty in late February 2013, strata-title property owners are prompted to offer their office units for lease rather than for sale over the near term, particularly in Kowloon East and Kwai Chung where a number of new buildings were completed in 2012. Rental rates for office properties with size ranging from 5,000 to 10,000 sq ft are anticipated to keep competitive over the next couple of quarters.
Over the next 12 months, Colliers projects the overall Grade A office rents to increase by 7%.
Meanwhile, the average Grade A office rent in Central is forecast to grow by 8%, slightly more than the overall, as the rental premium of top-tier buildings is expected to increase. In Kowloon East, as office rents are currently edging towards the maximum that most small-tot-medium enterprises can afford after the rapid growth for two years, rental growth is expected to be relatively mild at 5% in the next 12 months.
On the office investment front, the total value of office sales transaction of over HK$30 million decreased by 13.2% QoQ in 1Q 2013, largely attributed to the holiday periods. Buying interest is still coming from end-users, which was illustrated by the recent en-bloc sales transactions, for example, 113 Argyle Street which was purchased by Hang Seng Bank for own occupation and investment purposes.
Meanwhile, about 60% of the total turnover of office sales in 1Q 2013 was generated by the transactions in the Kowloon sub-markets. Lo explained this was driven by both supply and demand factors. “Amidst a slow residential market, local developers took the opportunity to dispose of their commercial non-core assets in order to boost their profits. Meanwhile, small-to-medium investors had their acquisition focus on office buildings outside Central, which involve smaller lump sums.”
During 1Q 2013, Grade A and Grade B office yields compressed further from 3.0% in December 2012 to 2.9% in January 2013. The yield difference between Grade A and Grade B office is virtually zero currently, but it is expected to expand gradually to the historical average of 80 basis points when investors factor in the risks of a typical Grade-B building.