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Hong Kong office rentals to rise further

HONG KONG: The recovery in office rents here is showing no signs of running out of steam, with continued growth seen in both core and non-core districts, according to consultants.

"In 12 months from now, rents of grade A offices will have shown strong gains, with the increase in Central likely to hit 20%," said Simon Lo, a director of research and advisory at Colliers International Hong Kong.

Continued demand for office space from the finance sector, particularly investment funds, would drive the sustained growth in rental returns, Lo said.

Knight Frank said the investment market was expected to see the benefits of rising yields as rentals continued to increase, but capital values would not keep pace as prices consolidated.

Between early last year and early this year, when the office market was in its initial phase of recovery, average prices of grade A offices surged by more than 70%, Knight Frank said, far exceeding average rent growth of 14.6%.

That resulted in declining yields, and during the same period grade A office rental yields fell from an average of 5.3% to 3.3%, according to the Rating and Valuation Department.

"This was a phase when property investors had priced in a full recovery in the real economy, and the leasing market had yet to catch up," Knight Frank said in its latest report on the Hong Kong office market.

"However, as the office sales market enters a consolidation period and leasing demand continues to pick up, yields are set to rise in the coming months."

Hit by the recent volatility in global stock markets and the worsening of the European debt crisis, grade A office prices suffered a 2.7% fall in April, the largest month-on-month decline since February last year, Knight Frank said. They slipped a further 1.5% last month.

But at the same time growing demand for quality space continued to push up rents in core and non-core districts.

For example, Shinewing, a mainland accounting firm, leased a whole floor at the Lee Gardens last month, while luxury fashion brand Burberry moved into the same building, vacating its previous space in the Convention Plaza Office Tower building in Wan Chai.

Average grade A office rents accordingly increased a further 1.1% last month, after rising 1.4% in April, Knight Frank said.

Looking ahead, it noted there was now uncertainty in the market over the course that the sovereign debt issues in Europe would take and whether this would spread to other parts of the world.

If the situation worsened, this could give rise to a banking crisis and affect international trade, with the trade credit market being frozen.

Jones Lang LaSalle said the European debt crisis presented "unsettled skies" for real estate markets around the world.

But Lo took a more optimistic view and said the crisis would not get worse and real demand would continue to push up rents of grade A office space in the city. – South China Morning Post

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