Why central office rents will fall

November 28, 2011 / By

After reaching a high of HKD 102 per sq ft per month, rents in Hong Kong’s Central office market have started to turn, prompting some to question why given that vacancy rates are still at very low levels.

Since reaching their peak in September, Grade A office rents in Central have retreated by 4.5% and according to our most recent forecast, it is expected that rents will contract by a further 10-15% in 2012. So far, the correction in rents has been largely restricted to the top-end of the Central office market, where rents had moved considerably ahead of the overall market rate, and in buildings where significant vacancy had been accumulating.

Although demand has been slowing in recent months, underlying market fundamentals remain in good shape. Vacancy rates are still at relatively low levels, standing at just 3.7% in Central, as low as 2.2% in Wanchai/Causeway Bay and Tsimshatsui, and just 4.4% in the overall market. The supply pipeline over the next 12 months will continue to narrow, with only a small amount available for lease after excluding areas already pre-leased or for strata-title sale. Moreover, the recent announcement of major new lettings has improved the occupancy rate in buildings with higher vacancy.

So, if this is indeed the case, where is the pressure on rents coming from? The answer lies in the leases which will expire in the coming months. According to our analysis, leases on about five million sq ft of Grade A office floor space in Central (or about 20% of the Central Grade A office market) will expire in 2012. Although this may seem like a large amount, it is not unusual, and a significant proportion will be renewed. However, with most economists expecting growth to slow further in 2012, these lease expirations will provide leverage options for tenants who wish to negotiate more favourable rental terms, thus placing increasing pressure on rents.


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