Hong Kong office rents could fall 40%

HONG KONG: Office rents in Hong Kong, the world's most expensive office market, could fall by 40% if the economy suffers a hard landing, according to a property analyst.

The uncertain economic outlook spells a correction for the market, said Andrew Lawrence, Hong Kong property analyst at Barclays Capital.

Hong Kong's office rents have shot ahead by one-third over the last year. The city has the tightest office market in Asia, according to property brokerage Colliers International, with vacancies at just 3.7%.

Tight supply remains a supportive factor for office rents, Lawrence said, but he estimates that rents would fall 10% to 15% over the next two years if Hong Kong's economy pulls off a soft landing, as economists expect.

The pace of decline will escalate to between 35% and 40% if it suffers a hard landing, the analyst said in a report on Wednesday, Oct 26.

Any rental falls are likely to be subdued this year and Lawrence forecast a drop of at most five% in the second half of 2011.

But the rate will likely accelerate to as much as 25% in 2012 and rents could lose another 20% in 2013, depending on how Hong Kong's economy progresses, he said.

Of the major Hong Kong developers, Hang Lung Group has the highest exposure to Hong Kong office space, which makes up 33% of its net asset value, Lawrence said.

Sino Land also has a sizeable exposure, at 22% of net assets. The average exposure across major Hong Kong developers is 15%, the report said.

Among investors, Champion REIT has the highest exposure, with Hong Kong offices making up 79% of its portfolio, it said. Hongkong Land has 62% of assets in Hong Kong office space.

The Hang Seng Properties Index was down 1.5% at midday on Wednesday, compared with a 0.1% drop in the broader Hang Seng index .

Despite a recent rally in Hong Kong property stocks, "we believe the market has rightly priced in an increasingly negative view of rents and prices given our economic scenarios," Lawrence said.

"Despite the recent improved sentiment, the outlook for economic growth remains highly uncertain, making portfolio positioning and stock selection increasingly difficult."

On Monday, property brokerage Colliers International said Hong Kong office rents remain the most expensive in the world, at an average of US$213.70 (RM669.03) per square foot per year as of mid-year.

That was an increase of 32.3% over the last 12 months.

The brokerage's head of research in Hong Kong, Simon Lo Wing-fai, said he has changed his forecast for Hong Kong's office market, and now expects a decline of 8% in rents between the third quarter and the same time next year. — Reuters