Central office costs rise 34% in year; fastest pace in world

HONG KONG: Office occupancy costs in Central have risen the most in the world in the past year, up 34.2%, according to property consultancy CB Richard Ellis.

Annual office occupancy costs, which includes rent, taxes and service charge, grew to US$184.21 (RM570.78) per sq ft in the 12 months to September, or HK$123 (RM49.17) per sq ft a month. As a result, Central continues to rank as the world's second-most expensive office market, after London's West End.

The West End retains its top position among 175 cities worldwide, with an occupancy cost of US$193.69 per sq ft a year. Tokyo's Inner Central district is third, with an occupancy cost of US$158.08 per sq ft.

Hong Kong's non-core business areas also saw a boom in the office market. Areas such as East Kowloon recorded the third-sharpest spike in the world, gaining 23.9% year on year.

CB Richard Ellis said this reflected higher demand for office space in non-core areas because of lower rents and higher availability of quality offices compared with Central.

"There has been a strong demand throughout this year for buildings such as International Finance Centre and Exchange Square in Central business district," said Rhodri James, executive director of office services at CB Richard Ellis in Hong Kong. He expects this trend to continue into 2011.

James said that because the amount of office space in development was insufficient to meet demand, rents had risen strongly not only in Central but across the majority of Hong Kong Island and Kowloon's office districts.

The Asia-Pacific region saw a solid increase in office occupancy costs in the last six months. The consultancy said increased economic activity had boosted demand while a strengthening yuan means costs have risen relative to other markets.

The Hong Kong office sales market overall has seen a strong growth. Data from agency Knight Frank shows grade A office prices have rebounded 84% from their trough in February last year.

The market saw a number of record-breaking deals recently. The 79th floor of The Center in Central changed hands for HK$338 million — a record HK$25,581 per sq ft.

"Office prices at Lippo Centre in Admiralty were about HK$13,000 per sq ft early this year. But now prices have risen 25% to more than HK$16,000 per sq ft," said Desmond Poon, associate director at agency Chartersince Realty. He said the average price is close to the market peak of HK$19,000 per sq ft in 1997.

"I believe prices of grade A office will rise 25% in the coming year. It will definitely surpass the previous peak set in 1997. Transactions have increased sharply over the last few days after the US Federal Reserve unveiled its second round of quantitative easing policies last week."

Investors are increasingly interested in office space as prices in this sector are still lagging behind other properties, said Harry Chow Wing Hang, associate sales director at commercial agency Midland IC&I.

Knight Frank research shows grade A office prices are still 5% below where they were in February 2008. Retail properties are up 30.3% and luxury residential properties up 7.1% from their previous peak in 2008.

While prices of luxury residential and prime retail properties hit record levels a few years ago, grade A office prices are still below their 1997 peak.

"Office prices are still cheap, compared with other types of properties. It is very attractive to investors who are looking for a higher capital value growth. Also, investors expect office prices to rise further due to a strong growth in office rents," Chow said. — South China Morning Post
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