Hong Kong’s Central district office rental, the most expensive globally, is set to extend its biggest decline since the global credit crisis, according to the world’s two biggest realtors.
Leasing costs in the district where Goldman Sachs Group Inc. and HSBC Holdings Plc have offices will likely be little changed in 2013, Rhodri James, executive director for office services at CBRE Group Inc., (CBG:US) said. Jones Lang LaSalle Inc. (JLL:US) sees rents dropping “slightly” in the first half before picking up in the second, Ben Dickinson, head of Hong Kong markets, said.
Banks and brokerages, faced with slowing corporate finance activities, are giving up space in Central for locations in the city where rents can be two-thirds lower. Global financial services firms, including Bank of America Corp. (BAC:US), Morgan Stanley, Goldman Sachs and UBS AG, have announced a total of more than 300,000 job cuts worldwide since the start of 2011, according to data compiled by Bloomberg.
“It’ll be a fairly slow market in 2013,” CBRE’s James said in a Dec. 28 interview. “We’re going to keep seeing bad news in the banking sector and that’s not going away in the first half. If they continue to cut back and hand back space, we could be in a similar situation in the second half.”
An index compiled by Colliers International that measures confidence in the office leasing markets among brokers in Asia stood at 57.1 percent in the fourth quarter, compared with 62.9 percent in the first quarter and 55.1 percent in the third quarter. A higher number indicates a more optimistic outlook.
The average rent for prime offices in Central dropped 12 percent from a year earlier to about HK$98.80 ($12.75) a square foot a month at the end of the third quarter, according to Seattle-based Colliers. That was the biggest drop since 2008.
With financial services companies migrating their back offices -- and sometimes the entire operations -- away from Central, almost all other major office districts in Hong Kong posted gains in rental rates and drops in vacancies last year.
Central’s grade-A vacancy rate rose to 5.5 percent in the third quarter from 3.5 percent a year earlier, according to Colliers. Meanwhile, in Island East, Tsim Sha Tsui, and Sheung Wan, all within a 15-minute subway ride from Central, vacancies dropped to below 3 percent. In Kowloon East, an industrial and logistics area that is evolving into a back-office hub for banks, vacancies dropped to 9.6 percent from 12.9 percent.
“The trend will continue and that won’t just be for next year,” said Dickinson of Jones Lang LaSalle, the world’s second-largest commercial real estate brokerage, in a Jan. 8 interview. “We’re increasingly seeing banks looking very seriously at moving front-office operations to these locations. Central has such a rental premium against the other sub- districts and Hong Kong is an easy place to get around.”
JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc are among banks that have relocated parts of their operations to Island East, where Hong Kong-listed Swire Properties Ltd. (1972) plans to redevelop some buildings to add to its office portfolio of 10.5 million square feet.
For Central, even with rising vacancy, office occupancy costs still topped CBRE’s global survey for the second half of 2012, published in December. At an annual cost of $246.30 per square foot, it was 12 percent higher than the $219.81 of second-placed West End of London. Tokyo was third at $197.27, followed by Beijing’s central business district at $184.95.
“There’ll be another round of downward pressure, but rents are not going to tank,” said CBRE’s James. “There’s still a bit of vacancy in Central which is proving not easy to lease.”
Some Central landlords have over the past year lowered their asking rents by as much as 30 percent to attract tenants, Simon Smith, Hong Kong-based head of research at Savills Plc (SVS), said in an interview yesterday.
Bank of America is close to agreeing to lease almost 150,000 square feet of prime office space in Hong Kong billionaire Li Ka-shing’s Cheung Kong Center in Central, two people familiar with the transaction said last month. The deal, brokered by CBRE, is the biggest by space in the district since at least 2003.
The amount of funds raised in IPOs in Hong Kong in 2012 fell to $7.9 billion, the lowest since 2003, according to data compiled by Bloomberg.
Still, support for the office market this year could come from the continuing influx of mainland Chinese financial services companies looking to Hong Kong as a gateway to international expansion, said Savills’s Smith, who is predicting rents in the city to rise 10 percent in 2013.
“The international investment banks are less brand- conscious and more cost-conscious than people think,” he said. “But these mainland businesses want good quality premises and at the moment they’re finding it tough to get them.”
Prime office rents in Tsim Sha Tsui, a hub for trading firms and retail companies with a vacancy rate below 1 percent at the end of the third quarter, rose 9.3 percent to HK$49 a square foot per month during the year, while the biggest increase among all major office district came from Kowloon East, which gained 11 percent to HK$33 per square foot per month.
New prime office supply set for Hong Kong over the next nine years won’t be enough to meet half of the forecast demand for space, according to a study by CBRE published in October.
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