Kowloon East Grade A office rentals’ moderate growth seen

Rental growth is expected to slow down in the second half as the office supply market of the site becomes more competitive.

Recent times has seen Kowloon East experiencing intense growth with the highest new Grade A office supply in Hong Kong, comprising a total of over 5 million sq ft new completion in the past 5 years. Coupled with infrastructure development in the district, Kowloon East with its various brand new Grade A office developments is an emerging key business district in Hong Kong - which has attracted a number of corporations - including MNCs to relocate their offices there. In terms of tenant profile, sourcing and manufacturing companies make up the majority of tenants in Kowloon East.

This increasing attractiveness of Kowloon East, coupled with its generally lower rental rates as compared to other traditional key business districts on Hong Kong Island and Tsim Sha Tsui, have enticed many conglomerates to snap up the quality new Grade A office space in Kowloon East.

“The solid occupational demand has fuelled rental growth in Kowloon East. In the first half of 2011, the average Grade A office rent surged 16% to HK$29 per sq ft per month in June 2011. This growth has subsequently reduced the rental gap between Kowloon East and Tsim Sha Tsui, which narrowed 18% from HK$17 per sq ft in June 2008 to HK$14 per sq ft in June 2011,” says Simon Lo, Executive Director of Research & Advisory, Colliers International Asia.

Following double-digit increase in the first sixth months of 2011, rental growth will likely experience slowdown in the coming six months as the Grade A office supply market in Kowloon East becomes more competitive. In addition to the office projects under sizeable landlords’ ownership, strata-title office owners make up a large percentage of the ownership mix. There are a number of strata-title leasing stocks in the new office buildings such as C-Bons International Center, MG Tower, Billion Centre, Legend Tower, etc. in Kowloon East.

“The proportion of Kowloon East’s Grade A office leasing stock under strata-title ownership increased from 26% in June 2010 to 31% in June 2011,” says Fiona Ngan, General Manager of Office Services, Kowloon. “In general, strata-title owners are the first ones to react in competitive situations by offering lower rents than those owned by portfolio landlords. With higher proportion of strata-title office owners, rental growth momentum will face substantial pressure.”

In addition, the number of leases expiring in 1H 2012 for the Kowloon market is much lesser than those expiring in 2H 2011. This means lesser tenants will be on the lookout for relocation options or in the market for lease renewal. “With the more competitive supply market and a potential slowdown in demand, we foresee an adjustment in the Kowloon East Grade A office rental growth to a more prudent average of 8% in the second half of 2011,” projects Ngan.

On the sales front, the demand in Kowloon East is largely driven by overseas companies, local investors and end users. Despite the sales volume edging down by 12%, the average office price in Kowloon East rose 11% from HK$5,166 per sq ft in 2H 2010 to HK$5,712 per sq ft in 1H 2011. In the next two years, the sales market is anticipated to grow with more new buildings offered for sale. A total of 569,589 sq ft and 1,361,649 sq ft are expected to be available for sale in Kowloon East in 2012 and 2013, respectively.

Similar to the leasing market, Grade A office prices in Kowloon East are expected to face slight barriers to its further growth. 

“The end-user demand, seen shifting from lease to purchase, will continue, but likely at a slower pace,” says Ngan. “Demand from investors is expected to see taper off as banks adopt a more conservative mortgage strategy. However, with its promising future supported by the Kai Tak Redevelopment Project and subsequent rising rental, we still see Grade A office prices in Kowloon East increasing between 5% and 7% in the remaining of 2011.”