Thursday, September 24, 2009

Hong Kong office rentals arrest decline

Despite the slower pace of rental falls and increased leasing activity, vacancy rates are climbing

THE Hong Kong office market is mirroring the trend seen lately in the Singapore market - rents are still falling, but at a slower rate. Data from property firm Savills showed that overall Grade A office rents fell by 5.8 per cent in the second quarter of 2009. This is a slowdown from the decline of 11.1 per cent seen in Q4 2008 and 10.2 per cent in Q1 2009.

'The results indicate that the rate of decline of office rents has slowed, suggesting that we are approaching the bottom of the current down cycle,' said Savills in a report.

Savills Research now expects the rate of decline of Grade A office rents to slow over the second half of 2009 and record another 10 per cent slide for the remainder of 2009 before stabilising.

Knight Frank, which does monthly rental updates, noted that the month-on-month decline in the average Grade A office rent slowed to 1.9 per cent in July, after falling 3 per cent in June. Knight Frank expects that Grade A office rents will bottom out by Q4 of this year.

The trend is similar to what is happening in Singapore. Office rents in Singapore fell for the fourth consecutive quarter in Q3 2009, but the pace of decline has eased on the back of returning business confidence, said CB Richard Ellis (CBRE).

Data from the firm said that prime office rents in Singapore averaged $7.50 per square foot (psf) per month in Q3. This reflected a 12.8 per cent quarter-on-quarter decrease, compared with the 18.1 per cent decline in Q2 2009 and 18.6 per cent contraction in Q1 2009.

In all, prime rents have fallen 53.4 per cent in Singapore since their peak in Q3 last year.

As in Singapore, the slower decline in office rents in Hong Kong is partly attributed to the improving stock market.

'As the stock market has rebounded since early 2009, and mainland IPOs (initial public offerings) begin to make a comeback, we expect to see more demand from financial services in the coming months,' said Savills. 'Some international banks have already unfrozen headcount and are hiring selectively.'

But despite the slower pace of rental falls and increased leasing activity, vacancy rates are climbing. Hong Kong's Central area was the worst-hit district in Q2 2009 in terms of rents as well as vacancy.

As the banking, legal and financial centre of Hong Kong, the Central Business District (CBD) boasts the highest office rentals, and consists of about 13.4 million sq ft of Grade A office space. It alone accounts for 21.4 per cent of Hong Kong's overall Grade A office stock.

Data from CBRE showed that the overall vacancy rate for Grade A offices in Hong Kong averaged 9.7 per cent in Q2, down 7 basis points compared to Q1. In Q2 2008, the vacancy rate was 4 per cent.

The Central district fared worse. The vacancy rate for Grade A offices in Central averaged 5.2 per cent in Q2, down 24 basis points from Q1. Vacancy fell slightly over the quarter as there were some instances of positive take-up in the district over the quarter.

The decline in Central rents was also the most pronounced of all the districts, falling some 10.4 per cent over the quarter to average HK$75.30 psf. Rents in Central have on average fallen 43 per cent compared to the same period last year.

Landlords in the Central district have continued to adjust rents downwards in light of weaker demand for office space, as well as taking into account the rental disparity with other districts, CBRE said.

For the whole of Hong Kong island, negative take-up was seen in Q2. 'Negative take-up of 345,000 sq ft was recorded over the second quarter on Hong Kong island, largely as a result of companies reducing space requirements, handing back space to landlords, or relocating to lower cost buildings in Kowloon,' noted CBRE.

'However, some occupiers were noted to be upgrading from industrial or Grade B buildings over the quarter, attracted by low rents for newly completed buildings in Kowloon.'

Echoed Savills: 'Hong Kong's weak export performance is also affecting trading companies and prompting some to relocate to non- core areas to save costs.'

Among them are Sanyo Electronics which leased 47,300 sq ft in Kowloon Commerce Centre in Kwai Chung and Toshiba International Procurement which took up 14,000 sq ft in Manhattan Place, Kowloon Bay.

No new supply was completed in Q2, CBRE said. Pipeline supply for the remainder of the year will remain focused in areas such as Kowloon Bay and Kwun Tong, with several new buildings to provide about 700,000 sq ft upon completion before year-end.

Knight Frank also noted that while a rebound in rents had yet to be seen, the average office price had risen for five months running.

Knight Frank's data showed that month-on-month, Hong Kong's average Grade A office price climbed 1.4 per cent in July, following an 8.9 per cent growth in June.

Causeway Bay led the market, with prices rising 1.8 per cent, followed by Wan Chai and Tsim Sha Tsui, where prices went up by 1.7 per cent and 1.6 per cent respectively. The prices of some buildings reached new highs since the onset of the financial crisis. For example, a high-floor unit in Concordia Plaza in Tsim Sha Tsui was sold for HK$12,000 per sq ft - the highest level since September last year.

However, this means that the sales activity in the prime office market has slowed down, with the gap widening between asking and bidding prices. Around 270 sales transactions were recorded in July, down about 5 per cent from the previous month.

Source: Business Times, 24 Sep 2009

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