Escalating cost for HK's office spaces drives demand for Grade B Buildings:Colliers

Spiking rental for commercial spaces in HK has recently raised the question mark on the continued attractiveness of HK as the destination for Asia setup.

According to Simon Lo, Director of Research & Advisory of Colliers International, "Hong Kong has long enjoyed a favourable position as the choice destination for many global and local conglomerates looking to expand to Asia, however, with rental for Grade A office buildings going through the roof and the problem of limited stock in the market, Hong Kong may be looking at some serious competition from two other Asian hot spots namely Singapore and Shanghai.”

According to Colliers, as the regional financial centre for Asia, Hong Kong enjoys easy access to information, coupled with favourable tax schemes and institutional framework. On the downside however, rising pollution levels and insufficient international academic institutions are quickly escalating concerns among business decision makers and at the same time working more in favour of Singapore and Shanghai where the former enjoys the upside of both factors.

The average per square foot for office spaces in central business districts in Hong Kong have reached an annual average of US$145 per sq ft in the first quarter of this year while a similar location in Singapore and Shanghai are averaging US$78 per sq ft and US$37 per sq ft respectively.

With rising rentals, companies have started exploring options outside of the traditional core business districts for their offices. Wendy Lau, Executive Director of Office Services at Colliers International observes, “We are seeing a flurry of activity where a number of companies are moving from the conventional business areas to areas just slightly further from CBD zones such as Island East and the newly built International Commerce Centre (ICC) in Kowloon West. There have also been cases of new setups from the financial services sector who expressed their interest in having their base in Asian cities aside from Hong Kong.”

Of lately, another trend has also emerged from the horizon where companies have shifted their focus to Grade B office buildings to expand their option base. Many of these companies are exploring the purchasing option due to the relatively high potential of rental growth of Grade B buildings.

Says Antonio Wu, Executive Director of Colliers International’s Investment Services, “In contrary to Grade A buildings, the common sentiment is that many Grade B buildings in Hong Kong have not reached its full potential. This has naturally sparked an interest amongst business decision makers and investors who have been seen transacting a number of such buildings from early this year.”

The overall rental yields have tapered since last year but data clearly indicates that yield rates of Grade B buildings are higher compared to those of Grade A buildings. As of 2010, Grade B yields are hovering close to 4%. For example, the fifteenth floor of the Bank of America Tower was recently sold to a local investor for HK$308 million and carried a yield of 2.3% while a same floor transaction at One Lyndhurst Tower closed at HK$40 million with a yield of 3.5%.

“On both the rental and sales front, we continue to experience positive demand from both end-users and investors alike for Grade B buildings. A point to highlight is that market performance for Grade B buildings have par with Grade A following the financial crisis. Hence from a timing perspective, this may potentially be a good time for end-users or investors to jump onto the Grade B bandwagon which also has more options and availabilities. One such deal are two floors in Morrison Plaza with an asking price of HK$6500 per sq ft and corresponding yield of 3.9%,” adds Antonio Wu.