Savvy players are seeking to time the inevitable rebound of market confidence, and the market should recover quickly once sentiment stabilises.
Office Market
Though volatility and uncertainty continued in global capital markets, two factors are likely to prevent a major correction in Hong Kong Grade A office rents: the robust underlying fundamentals in the Grade A office market, with limited quality stock, minimal vacancy and a notable crunch in new Hong Kong Island supply over the next three years; and the increasing importance of China and Asia to financial institutions due to the region’s comparatively robust growth prospects in the current economic environment.
The Grade A office market maintained positive momentum, though growth slowed somewhat. The approximately 732,000 sf net floor space from the first phase of the International Commerce Centre failed to alleviate the prevailing supply/demand
imbalance, as the space was fully pre-committed.
Though growth has slowed down, overall prime office rent still surged 9.1% q-o-q to HK$71.74 psf (net effective) per month. Average rent in Central rose 9.4% q-o-q to HK$124.05 psf (net effective), while those in CBD fringe locations also performed well.
Sheung Wan registered the strongest Grade A office rental growth in the period under review, rising 11.8% q-o-q to HK$62.56 psf (net effective). However, rental gaps between non-CBD locations and Central remained wide, with Grade A1 Central buildings (e.g. One & Two ifc, AIG Tower and Chater House) fast achieving rents above HK$170 psf (net effective).
With most Grade A office space on Hong Kong Island fully occupied, competition for the limited availability in decentralised locations was fierce, and the recently completed One Island East in Quarry Bay was quickly pre-committed. Growing number of tenants are also considering Kowloon Bay and Kwun Tong as relocation options, due to their competitive costs and the superior quality of recent projects. The Kowloon market saw record high rental transactions and widespread contractions in vacancy during the quarter.
With broad-based expansionary demand and overall vacancy in prime locations falling to 2.2% from 2.9% in the previous quarter, landlords continued to raise rents, especially in Central where Grade A office vacancy is now below 1%.
However, tenant resistance has begun to emerge, with some occupiers implementing space-saving initiatives instead of committing to additional space at current rents.
Luxury Residential Market
The luxury residential market seemed unlikely to maintain the accelerated pace of growthas in the previous quarter. Local investors, particularly Hong Kong industrialists, have eased off amid the threat of US economic slowdown, which combined with other factors, could lead to factory closures in the Pearl River Delta region.
Many have adopted a “waitand-see”
No luxury residential properties on Hong Kong Island obtained occupation permits during the first two months of 2008, keeping the vacancy rate to as low as 1.9%. The average capital value of luxury residential properties in Mid-Levels, The Peak, Island South and Jardine’s Lookout on Hong Kong Island registered quarterly growth of 8.5%, moderate in comparison to the 15.5% surge in the previous quarter. Rents on Hong Kong Island registered stable quarterly growth of 4.8% on the back of sustained demand and shrinking leasing stock. The overall luxury residential yield dropped another 0.2 percentage points to 3%, the lowest level in past two decades.
The marginal spread between the yield and mortgage rate (now at about 2.5%), may dampen investment interest in luxury residential properties in the near term. Yet, the spread should improve as the cost of borrowing is expected to remain stable in 2008 while rental gains are expected to outpace price appreciation over the longer term.
Retail Market
Early indications of market consolidation, inflationary pressure and stock market volatility impacted local spending sentiment, albeit amid considerable growth in both incomes and retail sales volumes. The sales volume of basic food items has recorded negative growth for five consecutive months, indicating that purchasing power could be eroded by high inflation.
Some landlords remain bullish, resulting in high asking prices and rents. In contrast, retailers are more cautious and sensitive to rental costs due to the uncertainties on the global economic front. Given the current stalemate between landlords and retailers, vacancy in traditional prime shopping areas may begin to register mild increases in coming quarters, indicating that rents might have exceeded the market’s reach.
There is also some uncertainty over whether robust tourist growth can be sustained in 2008 given the Euro 2008 football tournament, the Olympic Games and the global financial turmoil. While the extent of these effects and the anticipated strains in the global economy remain unknown, prices and rents of retail properties are likely to have limited, if any, room to grow.
A minimal average rental growth of 0.4% q-o-q was captured in prime retail districts, namely Central, Causeway Bay, Tsim Sha Tsui and Mong Kok, where rents are anticipated to remain stable at the present high levels in the short to medium term.
Industrial Market
The industrial market continued to register buoyant performance though the pace has been contained by challenges from external factors including the possible direct crossstrait links between China and Taiwan which may pose severe unprecedented difficulties to Hong Kong’s established transit role and the logistics business.
In the face of prevailing challenges, potential buyers tended to adopt a “wait-and-
Factory space experienced a consolidation in the first quarter of 2008, registering slight quarterly drops of 0.1% and 1.8% in rental and capital values, respectively.
Nevertheless, Hong Kong’s industrial market still has considerable support amid the current uncertain global financial environment. For instance, exports to Asia, including India and Vietnam, registered considerable growth, and demand from logistics players who are adding capacity to serve the growth from these emerging economies has helped offset the impact from the weakening US market. Stable demand for warehouses saw rental and capital values rise 5.1% and 2.6% q-o-q, respectively.
The government is keen to encourage hotel development, including business hotels in former industrial districts where land use has been changed, demand from developers for industrial properties with hotel redevelopment potential is likely to be strong in the short-to medium-term. Given their flexibility in terms of land use, industrial/office (“I/O”) properties continued to be popular among investors. In the first quarter of 2008, rental and capital values of I/O properties registered q-o-q growth of 2% and 4.2%,
respectively.
