(Updates with comments from Barclay’s report in fourth paragraph.)
Oct. 26 (Bloomberg) -- Office rents in Hong Kong, the world’s costliest place to lease commercial space, may fall as much as 40 percent over the next two years if China goes through an economic “hard landing,” said Barclays Capital Research.
A hard landing would cause vacancy rates to rise to as much as 8 percent by 2013, which are “levels consistent with the global financial crisis,” Barclays’ Hong Kong-based analysts, Andrew Lawrence and Vivien Chan, wrote in a report today. Rents may fall 10 percent to 15 percent in a “soft landing,” it said.
Global firms have become more mindful of costs as U.S. economic growth stalls, Europe struggles with a sovereign debt crisis and as companies announced more than 120,000 job cuts this year, data compiled by Bloomberg Industries show. Deutsche Bank AG and UBS AG yesterday signaled more job cuts maybe on the way as revenue from investment banking decline.
There has been “a shift in tenant concerns from securing expansion space to a greater focus on controlling real estate costs,” the analysts wrote. “Some tenants who had previously negotiated options on additional floor space will no longer be taking them up given the weakening economic outlook.”
Still, rents are unlikely to come down significantly in the second half of this year as supply for new office space and vacancy rates in most buildings remain low, the analysts said.
Prime Office Rents
Prime office rents in Hong Kong have risen 60 percent since July 2009 as financial services companies expand amid increasing corporate finance activities by Chinese companies, according to CBRE Group Inc. Grade A office rents in Hong Kong reached $213.7 per square foot a year as of June, the costliest in the world, according to Colliers International.
Vacancy rates in Hong Kong currently stand at about 4.8 percent, compared with a “long-term average” of about 6.8 percent, according to Barclays.
A total of 3.7 million square feet of prime office space is expected to be added in the city between this year and 2014, compared with an average annual supply of 2.4 million square feet since 1987, Barclays said.
“Few landlords see the need at the current time for materially lower rents, pointing to low vacancy rates within their portfolios and the limited amount of supply coming to the market,” the Barclays report said.
--Editors: Tomoko Yamazaki, Andreea Papuc
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