HK office market into full recovery

HONG KONG: The office sector in Hong Kong has entered into a full recovery, with property values being driven higher and rents going up, according to Barclays Capital.

Amid strong demand, the investment bank forecasts year-on-year growth in grade-A office spot rents of 20% to 25% this year.

Rents will continue to go up 20% in 2011 and between 15% and 20% in 2012. The growth is backed by a significant drop in vacancy rates as demand rises and supply grows.

Grade-A office market vacancy rates have declined from their peak of 9.1% in November 2009 to their current level of 4.9%, according to research by Savills.

The largest decline has been in East Kowloon, where vacancy rates have fallen from nearly 30% at the start of 2009 to just 7.9% by the end of August.

Barclays said this sharp fall in vacancy rates reflected increased office space take-up and a relatively low level of new-office-space completions this year.

The investment bank estimates new grade-A office supply at 1.5 million sq ft this year, about 950,000 sqft next year and about 800,000 sq ft in 2012 — a total of 3.24 million sq ft or an annual average of about 1.08 million sq ft. This was far below the long-term average annual supply of 2.35 million sq ft, it said.

"This low supply reflects a lack of prime sites put to the market by the government and the increasing difficulty in obtaining planning permission for new developments," said Barclays Capital analyst Andrew Lawrence.

The government's removal of the Tamar Basin site for its own use, delays to strategic development sites such as the old airport at Kai Tak and the West Kowloon Cultural District, the removal of the Central Market site due to public pressure and the reallocation of sites to other uses, such as the conversion of Central's Murray Building from office to hotel use, have all combined to reduce available development sites, he said.

On the other hand, demand is increasing.

"Much of this demand for office space has been driven by a combination of renewed expansion plans post-2008 financial crisis, anticipation of a growing shortage of grade- A space and the attraction of upgrading to new office space," said Lawrence.

Net office space take-up is largely determined by employment growth in the office-based workforce and the amount of space occupied per worker, according to Lawrence. Both are expected to rise.

A recent survey by Hudson, a provider of permanent recruitment, contract professionals and talent management services worldwide, showed that net hiring in Hong Kong in the third quarter of this year was expected to see a significant pickup from the negative expectations of the second quarter of last year.

Hiring intentions are now back to levels seen in 2007-08 and imply growth in the office-based workforce of around 4.5% to 5% this year.

Barclays expects space per employee to increase to 158 sq ft this year and to slowly move back towards 149 sq ft by 2012.

Property consultant Knight Frank agrees. "Hong Kong's corporate sector is expected to remain in an expansion mode in the coming year, with local economic recovery taking hold and the mainland economy exhibiting robust growth," the company said.

The trend of multinational corporations shifting their operations to Hong Kong would remain intact and office demand would remain strong against this backdrop, it said. — South China Morning Post