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By Thams Nicol
12 May, 2015
Today, Hong Kong's commercial property market has become the world's most unaffordable. Not only are businesses finding space harder and harder to come by, but workers too are struggling to find affordable housing.
What are the costs?
In terms of cost, average office rent for the overall HK market was HKD 59.7 per sq ft per month (NFA) at the end of December 2014. Central rentals remain the highest among all submarkets, standing at HKD 90.4 per sq ft per month (NFA).
Among the five major office submarkets, the two decentralised locations, namely Hong Kong East and Kowloon East, offer the lowestrental rates in Hong Kong. Rents are cheaper in these two locations as they are geographically further from the core commercial areas of the city. They are also not considered traditional major office submarkets.
According to Eric Chong, commercial property specialist at JLL, the simple truth is that overall, rentals across all submarkets are higher compared to those of five years ago. Hong Kong office rentalhas suffered from a supply/demand imbalance which has contributed to this. With supply remaining tight, demand for office space, which fluctuates with both the local and global economic growth, has a higher impact on rental movement.
Office rental in HK in the future
The supply pipeline is expected to enlarge in the coming years, with the government’s work transforming Kowloon East into the city’s next Central Business District (CBD2). Several commercial real estate development sites in Central are expected to be launched for sale via public tender. The decentralisation of companies seeking office space looks set to continue.
Overall though, a change in the structure of this decentralisation is on the cards. In the past, we have seen large western banks setting up back offices in Hong Kong East and Kowloon East for cost-saving purposes. But with more high-spec new Grade A office space in Hong Kong coming on the market, soon we will see some banks moving their front office to Hong Kong East or even Kowloon East.
Central rentals have always fluctuated with the demand for office space from the finance, insurance, real estate and business services (FIREBS) sector. Ever since the global financial crisis, large financial firms and western banks have adopted a cost saving approach in their real estate decisions.
Historical harm to the commercial property market
Hong Kong's office leasing market has recovered since the 2008 GFC when central market rents bottomed out. Most of the large western banks are likely to continue to adopt a cost-cautious approach and are unlikely to expand significantly. Demand for office space should be supported by requirements from mid-tier, Chinese banks and other new set-ups.
All in all, we forecast moderate rental growth across all submarkets with the exception of Kowloon East, where supply competition from industrial refurbished projects is likely to continue to weigh on rents. Rental growth in other office submarkets is expected to be supported by moderate demand for office space on the back of modest local economic growth.
After the purchase of the East Tower of One Bay East in Kwun Tong, we expect more large banks and/or MNCs to purchase upcoming Grade A office developments for their own use. China Life, for example, is reportedly in negotiation to purchase One Harbour Gate in Hunghom for HKD 9.0 billion. The project is expected to be completed in 2016.
JLL Propertyis a commercial leasing specialist in Hong Kong who will be delighted to assist in your search for the perfect Hong Kong office.
References for data: All supplied by JLL / Eric Chong in original interview
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