Steady economic recovery expected to boost demand for more, bigger spaces

A limited supply of top-grade office buildings in Hong Kong will result in a 5 to 10 percent rental cost increase in such office buildings in the city for the second half of 2010, international property adviser DTZ said, adding that, from the supply perspective, it supports the estimate that the top office rental rates in the city are on an upward trend.

"Looking back at the office supply during 2006 to 2009, the average GFA (gross floor area) each year was 3.03 million square feet, but from 2010 to 2013, the average annual supply is expected to decrease to 1.72 million square feet, which is to support further growth in office rental," said Andy Yuen, director of the office agency at DTZ, in a media conference Monday.

According to data complied by DTZ Research, rental of Central AAA, a basket of top-notch office buildings including IFC, Charter House and Cheung Kong Centre, registered a 3.8 percent quarterly increase to HK$86 per square foot in the second quarter of 2010. Demand for such top-level office space, according to Mark Price, DTZ's head of Business Space in North Asia, will see the strongest rebound, pushing up the rental gains to a maximum of 10 percent in the second half of 2010.

"As economic conditions improve, professional service companies in Central will be likely to expand their operations, which means that the current limited office space supply cannot satisfy market demand," said Price.

However, the international property consultant admitted that the current rental level cannot return to the market peak level of the second quarter of 2008, being at present 30 percent lower than the 2008 peak level.

Among various business districts, the property firm predicted that the Kowloon East district will be the "in" area for international business firms to expand their back-office operations - a forecast supported by the district's vacancy rate decrease from the market peak levels.

Though the vacancy rate in this district stood highest at 11.2 percent in the second quarter, it saw a decrease from the market peak, in a contrast with other districts. The average second-quarter office rental cost in Kowloon East was HK$21 per square foot, up 5 percent, quarter-on-quarter, DTZ said. DTZ estimates a steady 5 percent increase in the second half of 2010,

"The financial crisis in 2008 has in fact accelerated the growth of the Kowloon East office market when companies are looking for cost cuts and consolidation or relocation of back office functions and this trend continues today," said Alva To, DTZ's head of consulting in North Asia.

The increasing popularity of the Kowloon East district among professional service providers has been demonstrated by the rapid jump in rental levels as rental costs of AAA office buildings in the district rose quarterly by 10 percent to HK$22 per square foot, exceeding the rise in Central AAA in the same period, DTZ said. Citing reasons for Kowloon East's popularity, DTZ added that, because of its improved transportation and supporting facilities, the area is especially attractive for business expansion or relocation.

China Daily

(HK Edition 06/29/2010 page3)