23 September 2013, Hong Kong – Hong Kong is suffering from a lack of available office space with an average vacancy rate of just 3.8%, when major international office markets require 6% - 8% vacancy to operate efficiently. Larger occupiers in particular which are looking to consolidate operations in one location are struggling to find sufficient space at the right price. This situation is most acute in decentralized locations, such as Kowloon East.
Occupiers are now very cost conscious and seek cost efficient space. This translates into demand for office space in decentralised areas, where vacancy is normally higher and rents are cheaper. Kowloon East is the logical choice for such occupiers and some recent deals reflect this. Manulife, DBS, Parsons Brinkerhoff and Armani’s sourcing arm have all taken significant space this year in the area.
Despite this activity, vacancy has in fact crept up slightly in Kowloon East over recent quarters. However, this is largely due to small pockets of space becoming available. At present there are only 3 buildings in Kowloon East which have more than 25,000 sq ft available, and only one building offers this as contiguous space. Clearly the issue is not only one of a lack of space, but also the right type of space. Terry Shum, Executive Director of Office Services for CBRE commented “There are currently 38 occupiers each with a space requirement of over 10,000 sq ft seeking space in Kowloon. Taken together, this gives an aggregate requirement of 1.9 million sq ft in Kowloon which is currently unsatisfied. Many of these occupiers have expressed a desire to locate in Kowloon East but accommodating large space requirements in this market is a challenge at present.”
Certain occupiers are therefore forced to seek alternatives to satisfy their space requirements. This has led to a significant boost in demand for revitalized office space. Much of this is located in Kowloon East, and Kwun Tong in particular. One such project from Pamfleet on Hung To Road is expected to provide over 200,000 sq ft of office space towards end 2014 and already the signs are that demand will be very robust.
Given the strong rental growth in 2012 of 10% year-on-year some landlords set unrealistic asking rents for 2013. Although these have largely been adjusted to market levels, positive rental growth is still a characteristic of the market. Edward Farrelly, Head of Research for CBRE Hong Kong, Macau and Taiwan expects to see continued rental growth going forward, “Year to date rental growth through to the end of September was just under 3% and we expect full year rental growth in 2013 to reach 5% by year end. While this signals a certain deceleration, partly due to the lack of suitable options for occupiers, Kowloon East remains one of the main drivers of the Hong Kong market”. CBRE also sees the pace of growth picking up once more beyond 2013 as stronger GDP performance is expected to feed into greater demand for office space.
Kowloon East is set to see a sharp increase in supply from 2014 but aside from short term volatility Mr. Shum does not envisage a negative impact on rents, but rather thinks this should provide a platform for further growth, “Development levels in other parts of Hong Kong will be extremely low and we should therefore see a further shift in occupier attention towards Kowloon East. Furthermore, the addition of new buildings should provide not only sufficient volume but also the right type of space to attract larger, multinational companies. We also expect this to allow companies to consolidate within the area”.