Rentals in Kowloon East office submarket declines in 2Q14

Effectively altering 1Q14 gains.

In the Hong Kong office market, Kowloon East was the only major office submarket to post rental decline, reversing the gains recorded in 1Q14.

According to a research report from JLL, the correction was driven by increased competition from refurbished industrial buildings and landlords shifting properties from the sales to leasing market.

Meanwhile, capital values held firm across the market, the report said.

Despite the pressure on rentals, capital values in Kowloon East continued to move higher on the back of owner-occupier purchases and strong government land sale results.

Here’s more from JLL:

In one of the largest transactions recorded this year, Citigroup purchased the East Tower of One Bay East in Kwun Tong for a record HKD 5.4 billion (about HKD 10,600 per sq ft), reportedly for its headquarters.

The amount is 20% more than that paid by Manulife for the West Tower in 2013. Meanwhile, First Group Holdings won the public tender for a commercial development site with a maximum buildable GFA of about 193,500 sq ft in Cheung Sha Wan for HKD 1 billion (Accommodation Value HKD 5,177 per sq ft).

Demand for Grade A office space is expected to remain intact on the back of a moderately growing economy.

Demand from PRC firms, along with the steady growth of the Finance Insurance Real Estate and Business Services sector should underpin rental growth in Central.

However, rentals in Kowloon East are expected to face further downward pressure owing to increasing supply side competition.

Rentals in the overall market are forecasted to grow modestly for the rest of the year. With rentals holding up and holding costs remaining low, vendors are unlikely to lower asking prices.

With interest rates now expected to increase gradually rather than sharply, investors and especially end-users are likely to be on the lookout for opportunities, lending support to marginal capital value growth.