The Grade A strata-title office market in Kowloon East has grown considerably in recent years. Since 2008, a total of 1.5 million sq ft of new strata-title Grade A offices have been built in the submarket. The growth in stock has been matched by the surge in office sales volumes, which grew from HKD 626 million in 2008 to HKD 1.88 billion in 1H12. Moreover, prices have steadily risen over this period.

So what is driving the growth of the market?

To answer this question, first and foremost, we need to know that there is a distinct lack of tradable stock in Hong Kong’s Grade A office market. By our estimates, about only 20% of the total stock is held in strata-titled ownership. This essentially has created a very limited market with few opportunities for investors and owner-occupiers. Hence new strata-titled properties placed onto the market are quickly snapped up. In Kowloon East, investor interest is further supported by the higher yields on offer, relatively lower lump sums involved and the long term growth potential of the areas stemming from the government’s CBD2 development framework. Recently completed strata-title Grade A office buildings in the submarket have typically achieved pre-sales rates of at least 80% upon completion.

Against this backdrop, we have seen prices steadily rise. According to the Land Registry, the average transacted unit price for strata-title buildings in the Kowloon East Grade A office market climbed 28% y-o-y to about HKD 7,000 per sq ft (gross) in 2Q12. Coupled with the continuing growth in sales volumes, this suggests that investors continue to see value and potential in this submarket.

Looking ahead, I do not believe that the strata-title sales market will become saturated as the supply pipeline for strata-title Grade A offices in Kowloon East will gradually narrow over the medium-term. High land premiums, soaring construction costs and the on-going emergence of Kowloon East as a preferred office location will lend support to prices. Notwithstanding any unforeseen economic calamities, I expect the Kowloon East Grade A office market to continue to reach new highs over the short term.

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