Hong Kong grade a office market: inflection point or the beginnings of a broad based recovery?

May 14, 2013 / By

Hong Kong’s preliminary GDP figures for 1Q13 were released last Friday, painting a picture of tepid growth. In year-on-year terms, real GDP grew by 2.8%, which was the same as in the previous quarter and largely in line with consensus expectations. Although uncertainties in the external economic environment continued to weigh on the merchandise trade sector, which actually recorded only modest growth after removing the exports of non-monetary gold, the exports of services grew by 4.9% y-o-y, compared with growth of 2.9% y-o-y in 4Q12.

For the city’s Grade A office market, the latest figures largely correlate with what we have seen on the ground through the early part of the year. Demand, which has been driven largely by cost-saving relocations over the past 12-15 months, has more recently started to show signs of strengthening. While the top-end of the rental market remains weak, demand in the mid and lower ends of the market has been supported by a moderate pick-up in the number of tenants willing to pay a slight rental premium to secure appropriate office space, both for expansion and upgrading purposes.

This modest pick-up in demand and market sentiment led to rents in the Central office market edging up in April for the first time since May 2012. Whether the market has merely reached an inflection point or the beginnings of a broad based recovery remains to be seen but if the results of the government’s latest Quarterly Business Tendency Survey is anything to go by, the near term outlook for the market remains positive, with overall business sentiment of larger business enterprises showing improvement over the previous quarter.

Looking ahead, Hong Kong’s economy remains on track to post growth in the range of 3-4% in 2013, as forecasted by private economists. Any upside in the economy, however, is unlikely given the on-going concerns in Europe and the sequestration-induced ‘pause’ in the US recovery.

Taking into account the performance of the office market through the early part of 2013 and outlook for the economy, we believe that the Grade A office market is still likely to bottom out sometime in 2013. Any recovery, however, is likely to be weak in view of the modest growth expectations for the local economy.


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