13 February 2012

Overall Grade A office rents to edge down 8% in the next 12 months and vacancy rates to rise to 5% in 1H 2012

Amid the austere external environment and volatile global stock market, the Grade A office market performance varied amongst different districts, according to Colliers International’s Hong Kong Office Research & Forecast Report.  The Central/Admiralty Grade A office rents continued to edge down in 4Q 2011, while those in the other key business districts on Hong Kong Island and Kowloon East remained unchanged or registered a growth.

The overall net take-up in the Grade A office market fell significantly by 81% quarter-on-quarter (QoQ) to 70,249 sq ft 4Q 2011, mainly due to the deteriorating business conditions amid a weaker global economic outlook.  In Central, the net take-up experienced a reverse hit from 125,000 sq ft in 3Q 2011 to -73,570 sq ft in 4Q 2011.

Meanwhile, the overall Grade A office vacancy edged down 10 basis points (bps) from 4.7% in 3Q 2011 to 4.6% in 4Q 2011.  Due to weak business sentiment, the relocation of cost-sensitive tenants from Central to other sub-districts raised Central’s Grade A office vacancy by 30 bps from 3.5% in 3Q 2011 to 3.8% in 4Q 2011.  However, in-house expansion and lease expiry of relocating tenants resulted in falling vacancy rates in Island East, Tsim Sha Tsui and Kowloon East, with Tsim Sha Tsui recording the largest fall in the vacancy rate from 2.6% in 3Q 2011 to 1.9% to 4Q 2011.

"Given the uncertain external environment, more financial tenants currently located in Central / Admiralty are predicted to relocate to cheaper alternatives in other sub-markets upon their lease expiry and individual tenants might look to surrender their leases.  Overall, the average Grade A office vacancy rate is predicted to edge up and reach the historical average of 5.0% in the first half of 2012," commented Simon Lo, Executive Director of Research & Advisory, Asia at Colliers International.

The weakening sign was also found in the average Grade A office rent, which fell 1.1% QoQ in 4Q 2011.  The average Grade A office rent in Central registered a decline for the second consecutive quarter, dropping by 1.7% in 4Q 2011 after the decline of 1.5% in 3Q 2011.  In general, due to slowing demand, individual landlords in Central were more flexible on rent negotiations. 

On the contrary, Kowloon East Grade A office rents rose 4.8% QoQ in 4Q 2011, following 3.5% QoQ growth in 3Q 2011.  The support was attributed to the sustained expansion and consolidation demand from tenants having their offices in Kowloon East, and demand from the financial and non-financial companies who chose to set up their companies in this district.

On the sales front, the office market in Kowloon East was also on a relatively upside compared to the other districts.  “As there is limited supply of both strata-title and en-bloc office properties in other sub-districts, and the government has announced initiatives to transform Kowloon East into the city’s second major business hub, both financial and non-financial tenants have been attracted to Kowloon East,” said Lo.  “In anticipation of the prospective rental catch-up, investors remained keen to acquire Kowloon East’s office premises, particularly the average price level was much lower than those in traditional business locations on Hong Kong Island.”  Prospective buyers were also attracted by the premium rental yield in Kowloon East, which ranged from 3.5% o 3.8% per year in 4Q 2011, compared to those below 3% per year for quality office premises in the core locations on Hong Kong Island.

Looking forward, Grade A office rents in Central are predicted to see increasing downward pressure due to weakening rent affordability of financial tenants amid deteriorating business conditions.  According to Colliers’ research, Central Grade A office rents are forecast to drop 20% in the next twelve months.  However, the overall Grade A office rent is forecast to fall 8% in the next twelve months, in anticipation of resilient rental performance in decentralised markets where rents are generally 50% lower than that in Central.

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