25 July 2012

Spill-over benefits Kowloon West office market

The Kowloon East office market has been growing as the spotlight becomes more apparent on it. The district has witnessed more new and high quality office buildings being opened and a diversified range of tenants - from sourcing, manufacturing or garment related firms to banks and insurance companies – who snapped up office spaces in the district. In June 2012, the vacancy rate of Grade A single-owned office buildings in Kwun Tong and Kowloon Bay dropped to 2.2% and 5.2% respectively.

In addition to the decreasing vacancy level, office rents in Kowloon East have been increasing as the district gains popularity in the local office market. In June 2012, office rents in Kowloon Bay rose 2.5% month-on-month to HK$16-31 per sq ft per month, while that of Kwun Tong held stable at HK$21-32 per sq ft per month compared to May 2012.

According to Colliers International’s research data, the Kowloon East Grade A office rent was at 20% discount of that in Island East. The Grade A office rental difference between the two sub-markets reduced to HK$8 per sq ft per month in June 2012 from HK$11 per sq ft per month in June 2011.

“The office rents of individual buildings in Kowloon East have increased to over HK$30 per sq ft per month. For some, this means that rental savings derived from sub-market relocation is marginal for individual tenants, for example, those paying a monthly rent of about HK$40 per sq ft in Island East. To these tenants, it no longer makes dollar sense to move to Kowloon East,” said Patrick Mak, Senior Director of Office Services, Kowloon at Colliers International Hong Kong.

With the reduction in rental savings, Mak said relocation demand had moderated causing rental growth momentum to be under pressure in Kowloon East. He expects the growth of the average office rent in the district to plateau or peak out in the second half of 2012.

Interestingly, this situation has given rise to the birth of a new potential office district in Kowloon. “With
peaking rents, limited stock availability and decreasing vacancy, Kowloon East has paved the way for a demand spill-over to the other locations in Kowloon such as the Kowloon West district,” added Mak.

For tenants that have more flexibility in location and look for office spaces at economic rental, Kowloon West is fast becoming a popular target.

As at end 2011, there are 3.8 million sq ft Grade A office spaces in Cheung Sha Wan, Lai Chi Kok, Kwai Tsing and Tsuen Wan sub-markets in Kowloon West, representing about one-third of the total stock in Kowloon East. The examples of benchmark office buildings in Kowloon West include D2 Place in Lai Chi Kok, Kowloon Commerce Centre in Kwai Chung and Nina Tower in Tsuen Wan.

“On the rental front, offices in Kowloon West offer notable discount compared to those in Kowloon East,” piped Simon Lo, Executive Director of Research & Advisory, Asia. “In Kowloon West, particularly Cheung Sha Wan and Tsuen Wan, the average office rental increase has not been as strong as that in Kowloon East over the past couple years, thus resulting in an expanding rental gap between the two districts, from about 5% and 8% in 2009 and 2010 respectively, to about 13% since 2011,” he said.

The rental discount of Kowloon West sub-markets is even more substantial compared to the key business districts on Hong Kong Island, which ranged from about 18% to 75% in June 2012.

“As Kowloon West is a new business district, quality buildings are still being offered at a significant discount relative to those with similar quality in other locations. In addition to the attractive rental rate, various new supply and sizeable office spaces, the likelihood of Kowloon West moving slowly into the spotlight amongst tenants is hovering high,” concluded Mak.

Colliers International | Myanmar 11/F, Units 10-12, Sule Square Office Tower, 221 Sule Pagoda Road, Kyauktada Township, Yangon, Myanmar​ | Tel: +95 9 314 916 78