Central records highest office rental growth in 2015

No new supply in next four years virtually.

It has been noted that thanks to diminished Central rental premium and the implementation of the Hong Kong Shanghai Stock Connect, Central recorded the strongest office rental growth in 2015, as financial institutions continued to enter or expand.

According to a research note from Credit Suisse, in particular, more than ten floors were taken up at Citibank Plaza which removed the bulk of the vacancy in Central.
Net take-up in Central amounted to circa 600k sq ft in 2015, 2.3 times the ten-year average take-up of 262k sq. ft. Meanwhile, vacancy improved significantly to 1.3% as of end-2015 (end-14: 3.7%), compared to the historic low at 1.1% at end-1Q08.

Following an 13% uptick in rents in last year, the widening of Central premium and economic uncertainties may cause more companies to consider relocation options. That said, Central will still benefit from no new supply and limited options in decentralised areas but given Credit Suisse's expectations for a slower financial market in 2016, it forecasts Central office rents to moderate from 13% YoY in 2015 to +10% YoY in 2016E and 0-5% YoY in 2017E.

Low vacancy and rising Central rents will also support decentralised offices but as a number of grade-A office blocks are scheduled for completion in 2017/18, it is estimated that decentralised office rents will grow 0-5% YoY in 2016E and will start to come under pressure at -5% to flat in both 2017 and 2018E.

Here's more from Credit Suisse:

No new supply in Central, and supply should remain very tight in Central as there is virtually no new supply in the next four years.

Tight vacancy across districts. Central’s low vacancy rate can deter tenants from requiring larger areas (floor plates) or looking to expand the current space, as expansion within the same building or vicinity is difficult. Situations are not much better in most other districts, leaving Kowloon East as the sole candidate with the highest vacancy at 5.5% as of end-Nov 15. There is virtually no new grade-A supply in Central for the next four years.

Lack of viable choices. Kowloon East is earmarked as the next Central Business District (CBD) that will have potentially 43 mn sq ft of office space added in Kwun Tong, Kowloon Bay and Kai Tak under the government’s “Energising Kowloon East” plan.

However, the conversion of industrial buildings to offices and infrastructure upgrades are still underway. Also, many developments are still in the preparation stage and some of the infrastructure developments are facing delays.

The current infrastructure projects aimed at improving connectivity in Wanchai, Causeway Bay, West Kowloon, Kowloon East and Hong Kong East, such as the Shatin-Central Link (SCL) (potential delay after postponed to 2021 with original estimated completion in 2020) and Central-Wanchai Bypass and Island East Corridor Link (completion delayed from 2017 and now under review) may be delayed, with excavation complications impacting the Express Rail (delayed again and now expected to be 3Q18) and SCL (unspecified potential delay due to archaeological findings).

Of the new supply in 2016, just 29% will come from Kowloon East and the other new projects will be located outside the traditional major office hubs.
More importantly, around 60% are expected to be strata-title, which is unattractive to financial institutions. Strong yet slower stock market. We had another record year of fund raising activities in 2015. Our financial team forecasts a slower market to HK$731 bn in 2016E, down 30% YoY from HK$1,051 bn in 2015. Our financials team also forecasts a 15% YoY decrease in average daily stock market turnover to HK$91 bn.