Wednesday, October 24, 2007

BLUECHIP tenants are retreating from Hong Kong’s central business district as rents climb beyond reach.

BLUECHIP tenants are retreating from Hong Kong’s central business district as rents climb beyond reach.
The latest move away from the high-rent Central area is by lender DBS Bank (Hong Kong), which has just leased more than 220,000 square feet of office space in the Quarry Bay district, a 30-minute subway ride from Central.

The bank signed a 10-year lease for 11 floors at One Island East, a Grade A office block developed by Swire Properties. Relocation from DBS’s existing Central and Wanchai locations will be in phases, to be completed by the end of 2009.

Investment bank Morgan Stanley recently turned heads with its decision to relocate from Exchange Square in Central to the International Commerce Centre across the harbour in Kowloon.

It is leasing 10 floors for its Asia-Pacific headquarters, double the existing 150,000 sq ft it occupies in Central.

The decisions to move come as Central continues to command exorbitant rents, due to hot demand and tight supply. Rents in the area have gone up by more than four times since 2003.

The iconic International Finance Centre 2 building, which dominates the city’s skyline, is now fetching a record HK$160 (S$30) per sq ft (psf). When the building opened in 2003, rents were just HK$20 psf.

The shift to cheaper office space also reflects a demand for more space as many companies have benefited from a capital markets boom and seek to expand.

Simon Lo Wing-fai, director of research and consultancy for Colliers International, estimated that rental growth in Central will be up to 20 per cent in 2007.

But he expected the monthly figure to start falling if companies move out in search of cheaper rents.

‘Rental growth is tapering off quite substantially, especially after Morgan Stanley decided to move,’ he said. ‘Current rental growth is about one per cent a month. Next year, there might be a downwards adjustment.’

With no new supply coming online in Central, numerous building owners are preparing to renovate to expand their space and lure new tenants.

According to property firm Savills, Grade A office buildings in Central have risen for the past 15 consecutive quarters, surging 6 per cent in the second quarter of 2007.

However, new supply such as One Island East in Quarry Bay and some key buildings in Kowloon will continue to put pressure on prices, Savills reckoned. The One Island East project takes up a massive 1.5 million sq ft and has 70 storeys.

New developments in Kowloon, such as One Kowloon and Enterprise Square, are beginning to attract a critical mass of tenants. Both have hit an occupancy level of 70 per cent.

Meanwhile, other financial institutions are moving to the periphery of Central. China Construction Bank, for example, has taken up around 17,000 sq ft of Two Pacific Place in the nearby Admiralty district, according to Savills.

Sun Hung Kai Securities has likewise leased space in Admiralty Grade A buildings.

The overall office space vacancy rate in Hong Kong remains low, at just 5.3 per cent in July.

Source : Business Times - 22 Oct 2007

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