With the effects of the sub-prime crisis still to surface, the outlook for the office market remains cautious.
With the effects of the sub-prime crisis still to surface, the outlook for the office market remains cautious. The investment market is patchy with clear signs that speculators are retreating. Prices are likely to correct by 5 to 10 per cent over the next 6 months after dramatic growth of 35 per cent from Q4/2007 to Q1/2008. On the leasing side, with persistently low vacancy rates in core areas, Grade ‘A’ office rents remain strong but a possible slowdown in growth is on its way, according to Savills Hong Kong.
Central Invades Sheung Wan
Occupier demand remained strong in the office market over Q2/2008 driven by financial services tenants, including Mainland securities companies and banks.
“Overall Grade ‘A’ rents rose by 8.5 per cent in Q2, following an 8.1 per cent rise in Q1. This masks a wide differential as Central rents increased by 10.1 per cent while decentralised rents rose by a more moderate 3.1 per cent,” commented Simon Smith, Savills’ Senior Director and Head of Research & Consultancy.
Development of the area is taking place on a number of fronts. For example, 1,500 hotel rooms are due to come on stream over the next few years, broadening the appeal of the area.
In the east, Admiralty is also enjoying the attention of well known financial services tenants and is benefiting from the ‘spill over’ effect from Central. However, the area is limited in its potential size as government has taken up the Tamar Government Headquarter Development, limiting opportunities for developers and tenants alike.
Moreover, the growth of the Admiralty market is also restricted by the characteristics of Wanchai where an older image and the Grade ‘B’ office cluster on the Wanchai boundary serve to position the district very differently from the neighbouring Admiralty office market.
ICC has already benefited from tight availability in Central, but is likely to remain an ‘island site’ offering a unique position as a CBD annex.
Take up is expected to slow over the second half of the year as some investment banks have already decided to cut headcount, while recent volatile stock markets and cooling measures introduced by the Chinese Government will slow financial tenant expansion in Hong Kong.
“The Kowloon East office leasing market will be the focus of attention this year, with four new Grade ‘A’ buildings being marketed including Kwun Tong 223 and Landmark East in Kwun Tong, as well as two other developments in Kowloon Bay,” commented Maggie Chu, Senior Director of Kowloon Commercial Leasing, Savills Hong Kong.
These four quality buildings will together bring a total of 2.7 million sq.ft. net to the district. Decentralization to Kowloon East is expected to continue in 2008, while take up rates may slow.
Extremely limited new supply in core locations is forcing tenants to accept aggressive landlord offers or consider increasingly remote decentralization if large volumes of contiguous space are required.
Central has limited room to expand in the east but west of Central (Sheung Wan) is now emerging as a natural extension of the CBD, attracting investors as well as occupiers to the west.
“The rental savings on offer by relocating to the west of Central provide a strong incentive to make the move – at the end of Q2/2008, average rents in this location stood at HK$60 – HK$70 per sq.ft. per month net effective, while average rents in Central hit around HK$110 – HK$115 per sq.ft.,” said Ricky Lau, Senior Director of Hong Kong Commercial Leasing, Savills Hong Kong.
Sheung Wan benefits from its easy access to the Western Harbour Crossing now that West Kowloon is emerging as an office node. The proposed MTR West Island Line will also deliver easy access to residential catchments.
Outlook for Rents – Turning the Corner
“Rents have been rising strongly for over 4 years and are now above 1994 peak levels overall (though much higher in Central). Despite recent strength, it may finally be time for a slowdown,” said Simon Smith.
Corporates are limiting expansion plans and many of the banks have already met or exceeded their occupational needs. The liquidity crisis and China’s on-going battle to curb inflation and super-heated growth will also inevitably have a knock-on effect on occupier markets.
Ample new supply in decentralized areas such as Kowloon East should also act to cap rental growth and reverse it by the end of the year. “In non-core areas, rental declines of 10 per cent over the next 6 months are possible while downside is probably more limited in core locations where landlords may be able to hang on to many of the gains made over the past few years,” added Mr. Smith.
Office Prices Fall Back After Rapid Gains
“The investment market is patchy at the moment with clear signs that speculators are retreating, and institutional funds are turning cautious while some are even divesting,” said Peter Yuen, Savills’ Senior Director and Head of Investment and Sales (Hong Kong & Macau). Local cash buyers (‘old money’) are showing signs of re-entering in a hunt for quality assets, however.
According to Simon Smith, “The strata-title office sales markets took back some of their returns in Q2 after posting 25 per cent growth in Q4/2007 followed by 9.4 per cent growth in Q1/2008. As speculative gains were reined in, prices fell by 4 per cent over Q2/2008”.
In the en-bloc market, overseas funds continued to take an interest but purchasers were predominantly local. There was some evidence of prices being discounted by 5 to 10 per cent in order to secure buyers. Interest generally remains weak.
Outlook for Prices – A Swift Reverse
Volumes are likely to recede in the second half of the year with the level of impact relative to the effects of inflation and attempts to control it, as well as the effects of the liquidity crunch in Asia. There is some evidence of en-bloc prices already being discounted by 5 to 10 per cent in order to secure buyers.
“Given the dramatic growth in strata-title values (up by 35 per cent over the 6 months from 1st October 2007 to 31st March 2008), we believe that prices are likely to decline by a further 5 to 10 per cent to the end of the year as the froth comes off the market,” said Simon Smith.