Savills: Hong Kong offers a diverse choice of offices in decentralised locations

Rents of Grade A offices in the core business district (CBD) of Hong Kong are rising to unprecedented levels of nearly HK$200 per sq ft and this situation looks unlikely to change anytime soon.   However, these headline grabbing figures tend to obscure the broader reality that Hong Kong is a mature and diverse market offering a wide variety of office accommodation to tenants at a variety of prices.

According to the latest report released by Savills Research and Consultancy Services, Grade A rents in Central and Tsim Sha Tsui have risen by 25% and 13% respectively since September last year and, given the tight availability, this trend is forecast to continue.  In this climate, areas such as Island East and Kowloon East are likely to benefit from a ‘displacement effect’ as more tenants are enticed into relocating to offices in these neighbourhoods.

Island East first began to emerge as an office node in the 1980s with developments by Swire Properties and today offers a total of 8 million sq ft of Grade A space with a mix of complementary uses including retail, residential and hospitality, while rents in the area are currently on a par with Tsim Sha Tsui.  Apart from Swire, a number of other developers have entered the market including CITIC (DCH Commercial Centre), Hongkong Land (1063 King’s Road), Cheung Kong (Prosperity Millennia Plaza) and most recently, Kerry Properties (Kerry Centre). 

Kowloon East has been developed rather more recently at the initiative of the government to transform this traditionally industrial area into a business district which currently has 10.8 million sq ft of Grade A offices.  Vacancy in the district has fallen back to 11% (from 30% in 2008) as a consequence of competitive rents and high quality stock, prompting landlords to raise rents far earlier than anticipated.  

In fact, both Kowloon East and Island East have built strong accountancy, IT, insurance, marketing and communications and logistics clusters, and such industry concentrations are vital for landlords as they provide a powerful attraction to similar or related businesses and consequently help to drive the take-up of office space. 

Looking ahead, given the chronic lack of new supply which exists across the market as a whole, combined with strong economic growth prospects, Savills forecasts 40% upside for non-core office rents over 2011 and 2012.  In addition, there has been a pause in construction and few new buildings are expected to enter the market until 2014, thus increasing the upward pressure on rents in the meantime.