Price of office space reaches for the sky

HONG KONG: A steady influx of new business tenants and the expansion of financial institutions already present in the city has combined to produce a sharp increase in grade A office rents.

In Central, the average rent for prime office accommodation has risen 35% to HK$92 per sq ft since the beginning of the year, according to research by property consultancy Colliers International.

Data from property consultancy CB Richard Ellis shows 2.9 million sq ft of grade A office space was taken up in the last three quarters, compared with only one million sq ft during the whole of last year.

Despite the strong growth, the average rent remains below the peak level of HK$114.60 (RM45.83) per sq ft seen in the second quarter of 2008.

Colliers International director Simon Lo Wing-fai said: "Rents will be back to their peak levels by the end of next year if the global economy remains stable."

The pick-up in office rentals so far this year had been faster than expected, Lo said.

"We had originally forecast that overall office rents would rise by more than 10% this year.

"But they are already up by 29%," he said.

Improvements to the East Kowloon office market were one of the contributors to rental growth.

The area has been a main source of new office supply in the past two years. But the take-up rate has been strong this year, said Lo.

The vacancy rate in the district improved to 5.2% from 34% in the third quarter of last year.

And when most of the office space was absorbed, landlords started to raise rents.

Vacancy rates in Central, where office supply is tight and demand from multinational financial institutions and services companies is strong, have dropped to 2.8%.

Property agents said Standard Chartered Bank was negotiating with Hongkong Land to lease the five- storey The Forum redevelopment project in Central for expansion.

The project could provide gross floor area of 53,313 sq ft.

Standard Chartered Bank and Hongkong Land declined to comment.

Meanwhile, accounting firm Ernst & Young has leased 150,000 sq ft of office space at Citic Tower in Admiralty. A spokesman said the company leased the new office space for expansion.

Staff at the firm's existing offices at Two IFC and Hutchison House in Central will start to move into the new office next year.

Rhodri James, executive director of office services at CB Richard Ellis, said: "The take-up rate is almost triple the rate of last year."

Lo, of Colliers, said: "The strong growth in office rents in recent months was due to new demand from hedge funds and mainland financial institutions, as well as the tight office stock in Central." Notable among the institutions taking up space, he said, were medium-sized hedge funds setting up operations in Hong Kong.

Typically, they targeted prime grade A offices in Central offering 3,000 to 8,000 sq ft of space.

Mainland financial institutions were also targeting office space in Central.

Lo said: "They do not particularly focus on prime grade A office space.

"They are more concerned with the fung shui of office locations than their grade or rent."

But demand from the hedge fund newcomers had helped boost prime grade A office rents in Central, particularly in locations such as One and Two IFC, Chater House and the Cheung Kong Centre, which have recorded the sharpest growth among all offices.

James, of CB Richard Ellis, said the average rent of top-end offices in these buildings had surged 54% in the last three quarters.

He attributed the sharp increase to limited supply and low vacancy rates.

He said the outlook was for office rents to increase by another 20 to 30% next year. — South China Morning Post