14 January, 2011
International property adviser DTZ reviewed today the performance of Hong Kong’s grade A office market in 2010. The market rose markedly after the first half of the year as the local economy flourished, resulting in a whole-year accumulated take-up figure of close to three million sq ft, a sound increase from 2009. Most districts have shrunk vacancy rate compared with a year ago, and the overall rental of all districts have risen by 31.8%. It is expected the Hong Kong office market will continue to be buoyant in 2011 with a steady growth in rental.
After four quarters of negative take-up brought by the global financial crisis in 2008-2009, office net absorption in the overall Hong Kong market finally returned to the positive level of 813,718 sq ft in the first quarter of 2010. It rose by a large margin in Q2 to 853,985 sq ft and rose further in Q3 to 858,987 sq ft, before slowing in Q4 to 399,512 sq ft. Mr Alva To, DTZ’s Head of Consulting, Greater China, commented, “The market in Q4 was not as active as in Q3, with fewer major leases completed. For example, in Central/Admiralty, Tsimshatsui and Kowloon East, there was a drop in take-up from 55% to 87%. The drop is due to the combined effect of seasonal factor, rising rental and decreased availability in office space. The general market sentiment became more cautious in face of aggressive asking rentals.”
On the other hand, Island East had an impressive increase in take-up in Q4 at 111,467 sq ft, rising over 314% from Q3. This is mainly due to the launch of major office supply at Kerry Centre and the self-occupation of the owner in parts of the property. Take-up in Wanchai/Causeway Bay increased by 118% to 95,601 sq ft. “Total overall take-up jumped from -1,288,672 sq ft in 2009 to 2,926,202 sq ft in 2010, rebounding by more than 4.2 million sq ft, which is a strong indicator of the market’s vibrancy as Hong Kong’s economy recovered quicker than expected,” said Mr To.
In terms of vacancy, most districts still have more office space compared with the recent market peak. However, all districts have improved from a year ago except Island East, due to the aforementioned launch of new supply in Q4 which pushed the district’s vacancy rate up 2 percentage points year-on-year to 7%. Vacancy in Kowloon East shrank most on a year-on-year basis, by 16 percentage points down to 5.4%, followed by Wanchai/Causeway Bay by 2.7 percentage points down to 4.7%. In Q4, Central/Admiralty had the lowest vacancy rate (3.9%) among all districts, reflecting the crowded as usual market scene, but there is still some distance from the vacancy rate of 1.1% seen in Q2 2008, just before the global financial crisis set in. Mr To continued, “The overall vacancy rate of Hong Kong in Q4 was 5%, higher than the 3.5% in Q2 2008. The relatively high vacancy in Island East, Tsimshatsui and Kowloon East, which are all above 5%, means more choices of location for occupiers.”
Turning to rental trend, the overall HK market net effective monthly rental rose mildly from Q4 2009 to Q1 2010 by 2.3%; it then jumped 6.7% from Q1 to Q2, and a remarkable 10.4% from Q2 to Q3. The quarterly growth in Q4 remained strong at 9.4%. The rapid rise in rental was indicative of Hong Kong's economic recovery in 2010.
District-wise, Sheung Wan, Central/Admiralty and Kowloon East (overall) had growth of between 6.4% and 12.5% in Q4, which is slower than Q3. Despite this, Central/Admiralty remained the most expensive office location in Hong Kong, with a monthly net effective rental at HKD105 per sq ft. On the other hand, Wanchai/Causeway Bay, Island East, Tsimshatsui and Kowloon East (AAA buildings) had a bigger growth compared with Q3, with Kowloon East (AAA buildings) leading the pack at 16% up to HKD29 per sq ft.
Mr Mark Price, DTZ’s Head of Business Space, Greater China, commented, "By Q4 2010, Island East and Kowloon East had surpassed their respective market peak in Q2 2008, and Wanchai/Causeway Bay, Tsimshatsui and Sheung Wan were getting close, but Central/Admiralty’s overall rental is still 13.9% short (19.1% for the district’s AAA buildings). Over the year, Wanchai/Causeway Bay, Island East and Kowloon East recorded a bigger annual growth in rental and a bigger take-up than Central/ Admiralty. A large rental gap between them and Central/Admiralty justified relocation from the CBD for the purpose of cost saving. The increased choices of location in the non-core districts, the improved infrastructure and better office facilities also supported decentralisation for tenants who were resistant to the rocketing CBD rentals. This explained the faster growth in rental in the non-CBD districts in 2010.”
Mr Price noted that several FIRE institutes would be moving out of prime office buildings in Central/Admiralty this year, including Credit Suisse Holdings (HK) Ltd, Deutsche Bank AG and PricewaterhouseCoopers. “The potential increase in availability, along with the limitations due to the already high rental discussed above, might put pressure on the rental surge in the CBD. However, against the backdrop of a buoyant market outlook and strong business demand, and given the generally good affordability of tenants on the Island side, we expect Central/Admiralty and other districts in Hong Kong Island will still be able to see rental growth of 15%-20% this year. Judging from this trend, most districts in Hong Kong Island, along with Tsimshatsui, should surpass their recent rental peak in this year as these districts' rentals are within 10% from the peak, but the same may not be applied to Central/Admiralty, especially its AAA buildings, because of a larger distance from the peak rental,” said Mr Price.
As a result of the large-scaled relocation to Island East and especially Kowloon East in the last two years, these two districts experienced a rapid rise in rental. In the case of Kowloon East, its rental has gone up by 42.1% (overall) to 52.6% (AAA buildings), which was the biggest annual jump among all districts. “However,” said Mr Price, “in 2011, we expect the relocation from non-CBD areas to Kowloon East will slow to some extent. Occupiers will weigh the benefits of such relocation, because after the substantial rise the rental of Kowloon East edges closer to the level of Tsimshatsui and Island East. In this regard, the forecast rental growth of Kowloon East in 2011 will be less than that in 2010.”
A solid growth in rental over the year has been supported by business demand as well as a tight supply, for in 2010 the total office supply was only 1.67 million sq ft, similar to the level of 2009 but far less than the supply of over 6.6 million sq ft in 2008. 2011 is going to provide some relieve to the supply shortage. Mr Andy Yuen, DTZ’s Director of Office Agency, said, “A number of projects is expected to be launched this year with larger floor plates, most notably the OCTA Tower project in Kowloon Bay, the 133 Hoi Bun Road project in Kwun Tong and the One Island South project in Wong Chuk Hang, all of which are located at fringe office areas. Along with pockets of space in several redeveloped projects in Central, it is forecast that the total supply of office space in 2011 will amount to 3.26 million sq ft.”
Commenting on the supply, Mr Yuen said, “New supply makes a welcome return to Central/Admiralty after a long absence, but the scale of supply in the CBD remains scarce and is not expected to relieve the tight vacancy considerably. Although more choices of office buildings will be available in fringe areas such as Island East, Kowloon East and even Island South, the estimated average supply of the next four years (2011-2014) will be about 1.92 million sq ft, much tighter than the average supply of the past four years (2007-2010) at 3.15 million sq ft. The increasing occupier demand accompanying the economic progress is set to put strain on the supply side and give support to the rental growth.”
“The increasing business interaction within the Greater China and Asia Pacific regions will continue to benefit Hong Kong with more business opportunities and support occupier demand. However, one should also take note of the prospects of many Western economies which are still unclear. The operation and expansion budget of companies with Western-oriented businesses or with close trade connections with the West is still subject to uncertainty if their headquarters’ performance or business is affected by the prolonged drag of an economic slump. This remains a concern in an otherwise upbeat and vibrant office market of Hong Kong in 2011,” concluded Mr To.