London and Hong Kong office markets first to recover, says CBRE

LOS ANGELES: Among the four top-ranking international financial centres (IFC), London and Hong Kong’s office markets are the first to bounce back from the global economic crisis, said CB Richard Ellis (CBRE) in its report, “How Did They Fare? -- A Comparison of Office Markets in IFCs”. The other two cities are Tokyo and New York.

Investment volumes and values in London and Hong Kong have seen stronger improvements compared with Tokyo and New York. In London, this was attributed largely to overseas investors, enhanced by the pound’s depreciation while Hong Kong’s strong rebound in sales volumes and prices were driven by the relative financial strength of local investors and increasing interest from mainland Chinese investors.

With comparatively limited development in the pipeline for the four markets for 2010-11, the risk of excess supply depressing rental levels is reduced, which will improve the prospect for rental recovery, said CBRE.

“International Financial Centre markets are specialised, share high exposure to financial markets, and are inherently volatile. However, our report reveals key differences between these four IFCs in terms of the effects of the crisis and the trends that have emerged,” said Dr Raymond Torto, CBRE’s global chief economist.

London’s office markets registered significant pick-up in office demand as financial market conditions improved. The investment market has also seen a rebound in pricing and activity since 2Q2009 despite being an early casualty of the credit crunch. However, it could not top Hong Kong, which saw a large rebound in office values to almost pre-crisis levels.

The Tokyo market showed only hesitant signs of recovery while New York office market investment activity came to a standstill during the course of 2009.

The report found that while the four IFCS recorded similar proportionate falls in prime office rentals from peak to trough, the timing and market drivers differed. London’s property market had the most rapid response to the onset of the crisis and was the first to see rents climbing back up.

CBRE also noted that the four cities have different economic structures. For example; financial services in Tokyo are of less importance, less internationally oriented and carved a smaller share of the central business district (CBD) office market than in the other three cities, while the office investment market is heavily reliant on domestic investors.

New York was highly dependant on securitised debt that left investment activity depressed in 2009, with capital values being the most severely affected, recording a drop of around 55%.

Office investment values at the start of the credit crunch in mid-2008 were at highly elevated levels after a period of strong growth. The high values in New York, London and Tokyo reflected major yield compression driven in large part by debt-financed investment demand.

In Hong Kong, average office yields were more stable in the run-up to the crisis, and office capital growth was a result of rapid rental growth.

Contrasting trends in the four cities were seen in 2009. In New York, the demand for investment stock continues to be stifled by the lack of available financing and other factors, while Tokyo continues to be a buyer’s market, with brisker activity recently compared to 2009, thanks to financially sound domestic investors and some domestic lending.