Hong Kong, May 4, 2016 – Despite the overall slowing of the leasing momentum across Hong Kong, the insurance sector remains active in the office leasing market. CBRE notes that the sector has been and will continue to be a key driver of office demand, particularly in decentralized markets such as Kowloon East. Insurance activity has the potential to shield submarkets from experiencing greater supply side pressures as the completion of new office developments accelerate.
Rhodri James, Executive
Director of Advisory & Transactions Services, CBRE Hong Kong said,
“Banking and finance is undoubtedly a key driver of the market, but the
importance of the insurance sector cannot be understated. The sector ranked
fifth in number of transactions last year, and it was the second most active
sector in terms of space leased.”
The insurance sector has long been a source of innovation in
the market, both in terms of expanding into new areas and moving beyond
traditional leasing deals, beginning with the Manulife purchase of the 500,000 sq.
ft. West Tower of One Bay East in Kowloon East for self-use purposes.
“We fully expect this trend to continue going forward as
companies maintain a presence in key locations near client clusters but shift
the bulk of operations to cheaper, modern, well connected office space. Tsim
Sha Tsui, Wan Chai and Causeway Bay will remain a focus for front office
activity, but we will see expansion into other areas, particularly in Kowloon as
well as to a certain extent on Hong Kong Island,” added James.
Market transactions show no letup in the appetite for space
from insurance entities. Prudential took 70,000 sq. ft. expansion space in
Metroplaza (Kwai Chung), 30,000 sq. ft. in the Gateway Towers (TST) and 11,000 sq.
ft. in Millennium City 2 (Kwun Tong) and still may not have fulfilled its
requirements. On Hong Kong Island, FWD expanded by 26,000 sq. ft. in Devon
House.
However, demand is not limited to these more established
office nodes. AXA have renewed their leases on all occupied space in Kowloon
East but it will also relocate approximately 50,000 sq. ft. from AXA Centre,
Wan Chai to Vertical Square, Wong Chuk Hang.
The result of all this activity may be a softer impact on
rental levels in decentralized areas. With larger occupiers already reviewing
real estate strategies, some will undoubtedly relocate to new buildings,
further establishing decentralized locations as consolidated office hubs.
While the delivery of new supply will have an initial impact
on rents, increased vacancy is likely to dissipate through the market.
Moreover, this is likely to be staggered as companies move over different time
periods, therefore limiting the impact in any one area or at any one time. The
outcome is likely to be an easing rather than a sudden drop in rents and a
compression in rental bands across submarkets.
The Hong Kong office market is widely accepted
to be moving into a period of relatively greater rental volatility. Many expect
greater rental volatility to be more keenly felt in decentralized areas such as
Kowloon East, driven by an increased supply. It has also been argued that
Central will hold up better on the back of Mainland Chinese demand from the financial
services sector. However, while the latter may be true, conversely it may also
encourage larger occupiers to consider cost effective alternatives in
decentralized areas.
“Mainland entities are pushing up rents in Central. However, traditional larger occupiers don’t need to have mid and back office functions located in expensive core CBD buildings if there are more cost effective alternatives. Therefore, we are quite likely to witness a new wave of decentralization from the sector in anticipation of upcoming lease expiries over the coming years. As such, the trends and drivers of more expensive submarkets and buildings will be a key to how decentralized rents progress,” commented James.
Disclaimer:
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
