Vibrant business atmosphere sends rentals rocketing in Q3

08 October, 2010

International property adviser DTZ revealed today that the Hong Kong grade A office market witnessed a remarkable growth in rental in Q3 2010 as rental prospect was supported by a positive business atmosphere. Growing demand for office space meant that vacancy dropped in all districts and office space at prime locations was snapped up quickly. The lack of availability and choices made it difficult for tenants to move, leading to a slight growth in the territory wide take-up figure for this quarter.

The overall take-up rose from 853,985 sq ft in Q2 to 858,987 sq ft in Q3. Net absorption was led by Central/Admiralty, where the take-up rose quarterly from 52,767 sq ft to 115,338 sq ft, and Sheung Wan which rebounded from the negative take-up of -34,216 sq ft in Q2 to 35,297 sq ft in Q3. The two markets offset the drop in all the other districts and gave rise to a mild growth in the overall take-up.

Mr Alva To, DTZ’s Head of Consulting, Greater China, commented, “In Q3, it was the quality of take-up rather than the figure that reflected a bigger picture of the reality.” He pointed out that FIRE companies were again behind most of the activities in Central/Admiralty, with cases of expansion and consolidation as well. Some companies weary of the rocketing rental of the district chose to move from top-grade premises to lower grade ones. But all in all, vacancy was usually quickly filled, as the prestige linked with Central/Admiralty is greatly valued. “The need for corporations to establish their regional headquarters or representative offices in Central/Admiralty underpins the demand for office space in the district,” said Mr To.

A strong performance in retail sales in Hong Kong benefited many trades and boosted their need to expand. Part of the demand spilled to Wanchai/Causeway Bay in Q3 as companies looked for good locations and mature facilities. Several major leasing deals were recorded in this district.

Tight vacancy was the main reason that take-up did not rise by a bigger extent despite active leasing in various markets. This is particularly the case in Island East, which has been relatively quiet in Q3 as there was not much vacant space for companies to move around. In Kowloon East, the relocation of companies from more expensive markets continued this quarter, but Mr To argued that while such relocation exercise to Kowloon East with a purpose of consolidation and/or expansion looked set to become a long-term trend, as vacancy in Kowloon East is dropping quickly and rental is growing fast, some tenants will begin to weigh the benefits of relocating from other districts if their rental gap with Kowloon East is closing, for example Tsimshatsui. “Trades that are not location sensitive and seek even lower rental may have to consider other office locations such as Cheung Sha Wan or Kwai Chung,” said Mr To.

All districts recorded a drop in vacancy from Q2. The core office areas maintained a vacancy rate of around 4.1% to 5.7%. The tightest vacancy was in Island East (3.5%). The biggest drop was noted in Kowloon East (5.2 percentage points) from 11.2% to 6.0%, rendering the district’s vacancy rate to a single-digit figure for the first time. Mr To said, “The sharp drop in vacancy in Kowloon East reflected the popularity of the district as companies have been taking up the new office space readily. Vacancy rate of other districts has been largely stable, reflecting a constant business demand in the face of limited new supply.”

Rental growth is the most notable aspect of Q3, as this is the second straight quarter when the overall office rental of Hong Kong recorded quarterly rise. Among all markets, top-grade buildings (AAA) in Central/Admiralty had the biggest quarterly surge in net effective rental per sq ft per month, up 14.7% from HKD109 to HKD125.

Mr Mark Price, DTZ’s Head of Business Space, Greater China, commented, “The surge in Central/ Admiralty set off the momentum in other districts and encouraged landlords to be more aggressive in their asking rental. Some of the quality buildings in Central/Admiralty are asking a rental as high as HKD160 per sq ft per month, whereas in Q2 the range of their asking price was from HKD130 to HKD140. Landlords there have been optimistic towards the rental prospect and they were bold to raise the price.”

The overall monthly rental of grade A buildings in Central/Admiralty in general rose quarterly by 11.6% to HKD96 per sq ft, widening the gap again with the rental of Island East, which had a quarterly growth of 7.4% to HKD29. Mr Price continued, “At HKD96 per sq ft per month, the current rental of Central/Admiralty in general is still 21.3% short of its peak level of HKD122 per sq ft per month in Q2 to Q3 2008, but it has nonetheless returned to the level in Q1 2009; the recovery time here was about a year and a half. This shows just how readily business and office demand rebounded within a short period of time.”

Kowloon East saw its overall rental rising 14.3%, the biggest surge among all districts, to HKD24 per sq ft per month. Mr Price said, “Some top grade buildings (AAA) in the districts have raised their monthly rental by 13.6% quarter-on-quarter to HKD26 per sq ft, a level comparable to that of Tsimshatsui, Island East and even some buildings in Wanchai/Causeway Bay. It is evident that tenants have been increasingly drawn to the newer facilities in the district.”

Mr Price further noted that Tsimshatsui’s rental grew by only 4%, the lowest quarterly growth in all districts. “In face of coming vacancy due to termination of lease, some landlords in Tsimshatsui have been actively seeking replacement tenants recently. They became more cautious in raising the rental, which resulted in a mild rental growth for the district.”

The city-wide supply of office space remains tight for the coming few years and not until 2014 will there be more office supply in Central and other districts. Mr Andy Yuen, DTZ’s Director of Office Agency, said, “For 2010, the project with the largest supply is the Phase 3 of the International Commerce Centre (ICC) at Kowloon Station, which has a total GFA of 800,000 sq ft. However, because of a surge in general demand, new projects like ICC are hot and its office space is being absorbed very rapidly, leading to a shrinking vacancy. This reflects that supply in the foreseeable future remains tight.”

At the beginning of 2010, DTZ predicted the rental growth for Hong Kong’s various office markets to be between 0% and 5%, or 10% at most. Comparing the figures of the third quarter with those of the first quarter, the growth in most districts have reached 8% to 19%, with Kowloon East surging by 20% and Wanchai/Causeway Bay by 23%. This means that the performance of the local office market has been better than expected. “After a robust Q3, we expect the market will enter a period of consolidation in Q4, with less business activity towards year-end. Some tenants may also hold their decision to move amid the growing rental, leading to a slight drop in take-up in the next quarter. Nevertheless, given a steady economic development, we expect to see a more robust growth in rental in 2011, as the business demand in the Greater China and Asia Pacific region continues to increase,” concluded Mr To.

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