Hong Kong office market review Q2 2011

22 June, 2011

DTZ revealed today that net take-up in the Hong Kong office market rebounded strongly in Q2 2011, as a result of robust leasing activities. All districts recorded increased net take-up over the last quarter, which supported an increase in rents. Central’s rental levels have finally surpassed the pre-crisis peak level of three years ago. The upward trend is expected to continue for the second half of this year, although rentals will face greater pressure to see a dramatic rise because of forthcoming supply in core and non-core areas.

After a subdued Q1, net take-up rebounded strongly in Q2 to a total of 662,350 sq ft across the whole territory. District-wise, the focus was on Central/Admiralty and Tsimshatsui. Central’s net take-up figure of 242,339 sq ft was its third best quarterly recorded in the last five years, after the record of 277,510 sq ft in Q4 2006 and 257,931 sq ft in Q4 2007. The amount was almost equivalent to the entire take-up of Central/Admiralty in 2010.

Mr Alva To, DTZ’s Head of Consulting, Greater China, commented: “Central made a particularly strong comeback because some major deals that fell between Q1 and Q2 this year made up part of the bulk in the Q2 take-up. In addition, there were quite a number of in-house expansion cases in Central/ Admiralty this quarter that were small to medium-sized deals, with demand ranging from new initial public offering of mainland Chinese companies, hedge funds to other companies from the financial sector. Many of these companies prefer small office premises or business centres that offer a greater flexibility in leasing terms.

Tsimshatsui is another district with great quarterly increase in net take-up, from -115,152 sq ft in Q1 to 114,058 sq ft in Q2. Leases in the district were mostly medium sized relocations by finance and insurance companies and these leases made up a larger bulk of take-up.

Mr To said: “In-house expansion and a degree of decentralisation continued to be the trend in Q2, which boosted leasing activities in locations close to the core, such as Wanchai/Causeway Bay. Companies chose to have modest expansion plans in the face of the volatility of the global economy, and at the same time they do not have much choice in large floor areas in a tight market.

Net take-up in Kowloon East has been dropping quarterly since Q3 2010 and only stopped this quarter, with an increase from 25,597 sq ft in Q1 to 42,093 sq ft in Q2. Mr To said: “Compared with H1 2010, the take-up in Kowloon East in H1 2011 was 67,690 sq ft, which is about 6% of the 1,163,818 sq ft of take-up in H1 2010. The gradual slowdown in take-up shows that as the office market of Kowloon East matures, with rents rising and large floor areas quickly disappearing due to large-scaled decentralisation, good deals are decreasing.

The overall vacancy rate dropped to 4% in Q2 as all districts shrank further in office vacancy, with Tsimshatsui leading the pack at a shrink rate of 1.2 percentage points from Q1 to 5.5% in Q2 as a result of decentralisation. Office space in Central/Admiralty became tighter at 3.1%, down 0.9 percentage points from 4% in Q1. Wanchai/Causeway Bay absorbed some decentralisation demand, which caused its vacancy rate to shrink to 3.4%, on a par with Central. Vacancy rate of Kowloon East fell below Tsimshatsui for the first time to 4.8%.

Mr To said: “Companies find it more difficult today to find larger floor areas in Kowloon East for expansion purposes. The amount of office space available in that district is close to Tsimshatsui, giving further considerations to companies in their relocation decision.

The strong demand sent the rental rates of all districts to record highs again. At HKD124 per sq ft, Central/ Admiralty’s monthly net effective rents surpassed the peak level before the financial crisis at HKD122 per sq ft in Q2 2008. The AAA office buildings in Central commanded an average monthly net rental of HKD160 per sq ft, which is just 4.8% short of the pre-crisis peak level at HKD168 per sq ft. The decentralisation trend proved to be a strong boost to Wanchai/Causeway Bay’s rental which rose 11.4%, the largest increase among all districts this quarter, to HKD49 per sq ft per month. Big gains were also recorded in the AAA buildings in Kowloon East, where the monthly net effective rental rose by 9.4% quarterly to HKD35 per sq ft, slightly surpassing the Tsimshatsui rental at HKD34 per sq ft per month this quarter.

Mr Mark Price, DTZ’s Head of Business Space, Greater China, commented: “The half yearly growth in rental for all districts is between 13% and 21%, which fits DTZ’s forecast at the beginning of this year. Rental rates rocketed on the basis of growing demand from the financial and other sectors. With increasing business in mainland China, many companies prefer to establish a base in Hong Kong’s financial districts rather than in other locations in the Greater China and Asia Pacific region, as Hong Kong satisfies the operational needs of these companies. This trend is expected to continue in the near future and underpin the growth of rental levels.

As can be seen in Kowloon East, the rental hike was sharp. Now that its rental and vacancy rate is similar to the level of Tsimshatsui, companies will weigh up the benefits of relocating to Kowloon East,” said Mr Price.

After an upbeat H1, rental level of Central/Admiralty will face some pressure in further sharp hikes in the second half of 2011. Mr Price pointed out that upcoming space available in Central would increase, because of foreseeable release of space due to relocation, as well as new office projects launched this year, such as the 31 and 39 Queen’s Road Central projects. “Landlords will be keen to keep their tenants who increasingly feel the pressure of being priced out of the district. We thus expect Central’s rental to remain high but it may not rise further dramatically,” Mr Price commented.

Mr Andy Yuen, DTZ’s Head of Office Agency in Hong Kong, said, “Hong Kong’s office market used to have an annual supply of new office space of around 2 to 3 million sq ft. This year the expected supply in the development pipeline is around 3.26 million sq ft, which fits the norm. However, the expected supply in 2012 will be much smaller, at only 670,000 sq ft. So although rental development may be conservative in the second half of this year because of the upcoming availability of office space, it will be given a greater boost next year due to the very tight vacancy levels in most districts, given that the general business demand continues to be robust.

The two-speed recovery of the global economy is bringing more business opportunities to Asia Pacific locations like Hong Kong, whose unique advantages attract companies in need of developing closer business connections with mainland China. While business in the East is robust, the recovery in the West is sill slow and uneven. As a business centre, Hong Kong is still prone to the recession in the West and this may affect the operation of foreign corporations here. The size of take-up and rental level could be affected. In this regard, we take a slightly more conservative view towards the rise of rental in the second half of 2011, before it has the chance to take off again in 2012 due to the tight supply,” concluded Mr To.

Contact us