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Mixed fortunes for HK office market in 1Q 2012

According to CBRE’s 1Q research report, Hong Kong’s office market has registered contrasting fortunes during the first three months of the year. While rents have come under pressure in certain areas of Hong Kong Island, particularly in Central; Kowloon has proved to be far more stable. In fact, East Kowloon continues to attract much attention and prospects for growth remains positive.

During the first quarter of the year, rents in Hong Kong declined by over 3 percent. Rents on Hong Kong Island fell by over 4.5 percent as increased vacancy, principally in central areas, offered more choice to occupiers. However, a shift in demand to more cost efficient space once again drove vacancy down on the Kowloon side, providing a platform for continued rental growth. As such, rents rose by over 2 percent in Kowloon during 1Q.

However, despite the recent squeeze on Central rents, this may prove an opportunity for certain occupiers to capture space at attractive rents in the best buildings. While demand has been sluggish for most of Q1, occupier activity has picked up in Central in recent weeks. Tenants are attracted by lower rents as the average rent for the area has dropped by over 15 percent since the peak of the market in July 2011. In fact, the correction in the Central A1 basket was almost -25 percent during the same period. As such, tenants view this as an opportunity to secure space that would not normally be available given that the top buildings operate at almost full occupancy during most of the real estate cycle. While rents may indeed drop further, the window of opportunity will be small at the very bottom of the market as the situation for landlords is expected to improve next year.

Edward Farrelly, CBRE Head of Research, Hong Kong, Macau & Taiwan explains: "As markets correct downwards we generally see tenants jockeying for position before the bottom is reached. This is because the rent becomes sufficiently attractive and the desire to secure better office space takes over. While lower market rents may be achieved further along the cycle, the type of space currently on offer in the best buildings may not then be available."

According to CBRE, over 120,000 sq ft at the top end of the market is either under negotiation or has been leased in recent weeks. Much of this demand is from financial boutiques, fund managers and trading and commodity firms. In addition, there are early signs that pent up demand from mainland Chinese companies is now materialising.

However, a word of caution is also sounded by CBRE. Farrelly continues, "Despite early signs of increased activity we still expect some sectors to shed space over the coming months and the market overall is likely to remain relatively subdued through 2012. The outlook for landlords should improve through 2013 as the fundamentals look good and tight new supply is likely to provide a platform for growth."

He added: "Looking further ahead, tight pipeline supply means that we will once again see an acute lack of available office space beyond 2012. Some larger occupiers are therefore looking at their current office space requirements within the context of a long term strategy which seeks to take advantage of supply that is forecast for completion over five years from now. Interest is rising for upcoming areas such as Kowloon East and this will only intensify as developments there become more tangible."