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Hong Kong Real Estate office market report 2 q2011

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  • 1. 2Q 2011 | THe knowledgeresearch & forecast reporthong kong office c o l l i e r s i n t e r n at i o n a l | H o n G Ko n Gmarket Growth Pace tapering off the leasing demand for quality office space showed no signs of abating. existing occupiers and newcomers remained keen to look for quality office space to satisfy their business needs. the banking and financial industries remained one of the major sources of leasing demand in 2Q 2011. mainland banks happened to be the key highlight in terms of the number confirmed deals during the period. in addition, leasing demand attributed to a batch of newly-setup hedge funds, private equities and the existing players in the professional sector continued to drive the market during 2Q 2011. the new office supply in 2011 is anticipated to be about 1.16 million sq ft. the three developments in kowloon Bay/kwun tong will be responsible for about 80% of the pie. however, looking at the historical completion rate in the order of 2.2 million sq ft per annum, the total new office supply in 2011 is going to be about one half of the long-term level. given the fact that individual tenantsmarket indicators forecast have shown resistance to the current rental levels and the anticipated completion another two developments in kwun tong in the second half of 2011, the average vacancy rate of the whole overall performance market is expected to edge up to test the historical average of 5.0% in the next 12 months. new supply although individual top-tier buildings in central are predicted to see slowing growth, positive demand spillover from central is expected to benefit its adjacent business districts such as Wanchai/ causeway Bay. overall, upgrading and expansion demand are predicted to push average rental tenant demand upward by another 15% over the next 12 months. incentives the growing buying interests for the grade B office assets sent the average yield to a new low of 3.1% as of april 2011. the interesting point is that the yield of grade B offices was in par with that in the grade a sector which is used to fetch an average premium of 85 bps. Looking forward, the yield rents differentiation between grade a and B will continue to be marginal over the near to medium term. capital values GRADE A OFFICE RENT vs JOB VACANCY IN “FIRE” SECTOR 140% yields 120% Last Rally 100% Current Rally 80% 60% % change year-on-year 40% 20% Growth Tapering Off 0% Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 -20% -40% -60% -80% -100% FIRE Job Vacancy Grade A Office Rent Note: FIRE = Financing, Insurance and Real Estate Source: Census & Statistics Department, HKSAR Government; Collierswww.colliers.com/hongkong
  • 2. hong kong | 2Q 2011 | office employment trends hiring expectations according to the survey undertaken by hudson, hiring expectations in hong kong among the key business sector reached a record high of 69% in 2Q 2011 since the survey was first launched in 2003. Banking & financial services and legal sector were the two business sectors showing the strongest hiring expectations during the period. Banking and financial services according to hudson, the legal sector reported the highest expectations of 88% in 2Q 2011. Lawyers with good experience in the banking and corporate finance industries were the most sought after. meanwhile, hiring expectations in banking and finance services sector remained positive although the number of respondents anticipating to increase hiring slowed from 75% in 1Q 2011 to 73% in 2Q 2011. exceptional strong demand happened in both private and investment banking during the period. JoBs in the “fire” sector according to the latest statistics provided by the government, the employment market of the finance, insurance and real estate (fire) remained strong. however, in term of the growth pace, the percentage actually tapered off significantly from 53% in 4Q 2010 to 15% in 1Q 2011. Looking at the correlation between the pace of job growth in the “fire” sector and the trend of office rental growth in central, the former peaked in 1Q 2010 while the latter showed corresponding signs of peaking as of 1Q 2011, due to the typical time lag of 4 quarters. given the fact that more existing occupiers in central showing resistance to the current rental levels, the prospective growth of rentals is predicted to narrow in the coming quarters.p. 2 | colliers international
  • 3. hong kong | 2Q 2011 | office tenant DemandDespite the solid leasing demand, more strong net take-up floor comprising 12,288 sq ft at aia centraloffice occupiers have expressed their Despite the quiet period in the beginning of for an average rental of hk$135 per sq ft per 2011, the leasing demand for quality office space month. meanwhile, Bank of china committed toresistance to rentals fetching above showed no signs of abating. existing occupiers lease 25,884 sq ft on 25/f in millennium city 5,than hk$120 per sq ft per month for kwun tong, for an average rental of about hk$30 and newcomers remained keen to look for qualityan average building in central. office space to satisfy their business needs. With per sq ft per month. in addition, leasing demand an increase of vacant stock coming up for lease, attributed to a batch of newly-setup hedge the leasing market saw a significant pick up of funds, private equities and the existing players momentum with the overall net take up increased in the professional sector continued to drive the from 103,000 sq ft in 1Q 2011 to 252,000 sq ft market during 2Q 2011. in June, kPmg signed a in 2Q 2011. nine-year lease with hysan Development to take about 80,000 sq ft at 20-25/f in hysan Place, causeway Bay. after the physical completion of suB-market performance hysan Place by the second half of 2012, kPmg will the overall take up in the key business locations consolidate its central offices into one building. on hong kong island was uninspiring with the exception of Wanchai/causeway where the net take up increased by 53% during 2Q 2011. property alternatives Since the average grade a rentals in Wanchai/ against the backdrop of a sustained supply causeway Bay remained at a steep discount of squeeze, medium size tenants currently located more than 50% compared with central during 2Q in cBD with expansionary needs have seriously 2011, quality office space in Wanchai/causeway considered to split their operations but to keep represented the viable relocation options to a their frontline divisions in central. Property number of medium companies. overall, tsim Sha alternatives available next to central such as tsui and kowloon east were the sub-markets causeway Bay were popular amongst the existing responsible for the bulk of net take up during occupiers on hong kong island. 2Q 2011. rental resistance sources of demand Despite the solid leasing demand, more office Similar to the past quarters, the banking and occupiers have expressed their resistance to financial industries remained one of the major rentals fetching above than hk$120 per sq ft sources of leasing demand in 2Q 2011. mainland per month for an average building in central. banks happened to be the key highlight in terms however, office units in the cBD with asking of the number confirmed deals during the rentals in the order of hk$80 – 100 per sq ft period. for example, china construction Bank saw exceptional high level of inquiry and good is reported to have committed to take a whole absorption rates. GRADE A OFFICE NET TAKE-UP 1,400,000 1,200,000 1,000,000 800,000 Net Floor Area (sq ft) 600,000 400,000 200,000 0 1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2008 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 -200,000 -400,000 -600,000 -800,000 Source: Colliers colliers international | p. 3
  • 4. hong kong | 2Q 2011 | office supply conditions new developments in central no improvement in 2012 and 2013 Based on our newly-revised grading methodology Looking forward into 2012 and 2013, it is our for offices in hong kong, a number of office projection that there will be no significant buildings in central have been included in our improvement on the current supply situation. grade a supply list. the first one was the brand- the scheduled completion of hotel ritz-carlton new development located at 50 connaught redevelopment together with hysan Place (now road central. the building jointly developed by scheduled in mid 2012) will provide about national electronics and apollo global real estate 430,000 sq ft net office space in 2012. in management was completed in february 2011. 2013, the second phase of kcc currently under Lht tower, comprising a total of over 100,000 construction will be the only source of new supply. sq ft net floor area will be another grade a office building in central due available in 3Q 2011. kowloon east will remain the key source Beyond 2013 2011 will go Below the long-term going beyond, the volume of new supply coming average stream will depend on the construction progress in addition to Lht tower in central, the of the six proposed schemes located in central, development in kowloon east - 414 kwun tong taikoo Place and kowloon east (i.e. kowloon road will be scheduled for completion in 4Q 2011. Bay and kwun tong). according to the current Developed by Billion Development, mg tower status, all the projects are existing buildings. new has been offered for strata-title sales before its supply in core business districts will be limited physical completion. in total, the new office supply to the redevelopment of the existing hutchison in 2011 is anticipated to be about 1.16 million sq house and crawford house in central. kowloon ft. the three developments in kowloon Bay/kwun east will continue to be the key source of new50 Connaught Road Central Source: Colliers tong will be responsible for about 80% of the supply since three developments totaling 1.7 pie. however, looking at the historical completion million sq ft will be available in 2014 and beyond. rate in the order of 2.2 million sq ft per annum, in terms of size, the redevelopment of techno the total new office supply in 2011 is going to be centre in taikoo Place will provide tenants more about one half of the long-term level. decentralized alternatives on hong kong island. GRADE A OFFICE SUPPLY 8.00 7.00 6.00 Floor Area (million sq ft) 5.00 4.00 Long-term Average Annual Supply 2.2 million sq ft 3.00 2.00 1.00 0.00 1990 1991 1993 1994 1996 1999 1985 1986 1987 1988 1989 1992 1995 1997 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2013F 2012F Source: Rating and Valuation Department (1985-2010); Colliers (2011-2013) p. 4 | colliers international
  • 5. hong kong | 2Q 2011 | office grade a office supply (2011 – 2014 and Beyond) nfa Building district developer status (sq ft) 2011 new Supply 50 connaught road central central 122,648 national electronics / apollo global real completed estate management 18 kowloon east kowloon Bay 307,847 Sino Land completed mg tower (133 hoi Bun road) kwun tong 422,821 Billion Development completed Lht tower central 105,891 the Luk hoi tong co Ltd Under construction 414 kwun tong road kwun tong 203,570 chiefast investment Ltd Under construction 2011 Total 1,162,777 2012 new Supply hotel ritz carlton redevelopment central 191,250 Lai Sun/china construction Bank Under construction hysan Place causeway Bay 237,344 hysan Development Under construction 2012 Total 428,594 2013 new Supply kowloon commerce centre kwai chung 442,000 Sun hung kai Properties Under construction (Phase ii) 2013 Total 442,000 2014 & Beyond new Supply 10 harcourt road central 419,468 hutchison Under planning (existing hutchison house) 70 Queens road central central 156,641 Wheelock Under planning (existing crawford house) 979 kings road, taikoo Place taikoo Place 1,712,743 Swire Properties Under planning (existing Warwick house, Somerset house, cornwall house) 52-56 tsun Yip Street kwun tong 305,989 Billion Development Under planning (existing on king centre) 181 hoi Bun road kwun tong 262,650 Sun hung kai Properties / Wongs Under planning (Bare Site) 180 Wai Yip Street kwun tong 407,324 crown opal investment Ltd Under planning (existing industrial building) 98 how ming Street kwun tong 972,243 transport international holdings / Under planning Sun hung kai Properties (existing Bus Depot) 2014 & Beyond Total 4,237,058Note: Source: ColliersDemolition: Demolition work is actively undergoingUnder construction: Construction activity, including either foundation or superstructure, are undergoing on siteUnder planning (Existing Building): Building plan for a site, currently occupied by a tenanted building, is approved by the GovernmentUnder planning (Vacant Building): Building plan for a site, currently occupied by an empty building, is approved by the GovernmentUnder planning (Bare Site): Building plan for a bare site is approved by the GovernmentCompleted: Construction is completed and an occupation permit is issued by the Government colliers international | p. 5
  • 6. hong kong | 2Q 2011 | office Vacancy grade a office vacancy rates (By suB-markets) total stock district 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 (million sq ft) central / admiralty 21.4 4.0% 3.3% 3.0% 3.0% 4.0% Wanchai / causeway Bay 11.1 4.4% 3.8% 3.5% 3.3% 2.9% island east 10.9 3.3% 3.2% 5.8% 4.7% 3.9% Sheung Wan 1.6 5.8% 3.5% 5.3% 3.8% 4.5% tsim Sha tsui 6.4 6.8% 6.1% 4.8% 6.6% 3.9% kowloon east 8.2 9.2% 7.3% 5.5% 7.2% 9.8% overall 59.5 5.0% 4.2% 4.2% 4.3% 4.6% Note: Floor area on net basis Source: Colliers vacancy in central starts kowloon east Bounced Back to creeping up nearly 10% Due to the completion of new stock for lease and thanks to the sustained leasing demand, the the increase of available space in the secondary market in kowloon east continued to see market, the average vacancy of the grade a positive absorption rate for a number of popular18 Kowloon East Source: Colliers office market continued to edge up in 2Q 2011. developments such as millennium city and according to our research, the average vacancy enterprise Square. however, with the availability rate increased 30 basis points from 4.3% in 1Q of stock for lease at 18 kowloon east, the average 2011 to 4.6% in 2Q 2011. vacancy rate edged up further from 7.2% in 1Q 2011 to 9.8% in 2Q 2011. in central, an increase of stock of lease happened in both single-owned and strata-titled forecast vacancy developments. coupled with the completion of given the fact that individual tenants have shown 50 connaught road central, the total available resistance to the current rental levels and the space for lease increased, thus sending the anticipated completion another two developments average vacancy rate from 3.0% in 1Q 2011 to in kwun tong in the second half of 2011, the 4.0% in 2Q 2011. average vacancy rate of the whole market is expected to edge up to test the historical average of 5.0% in the next 12 months. GRADE A OFFICE VACANCY RATE TREND 9.0% 8.0% 7.0% 6.0% Vacancy Rate 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Mar-06 Sep-06 Sep-07 Sep-08 Mar-09 Sep-09 Dec-09 Jun-06 Dec-06 Mar-07 Jun-07 Dec-07 Mar-08 Jun-08 Dec-08 Jun-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Source: Colliersp. 6 | colliers international
  • 7. hong kong | 2Q 2011 | office rentals grade a office rentals (By suB-markets) 2Q 2011 district 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 (% QoQ) central / admiralty $79.9 $89.6 $97.9 $110.2 $113.4 2.9% Wanchai / causeway Bay $39.7 $42.8 $47.2 $55.2 $58.1 5.3% island east $28.4 $29.8 $32.6 $38.0 $39.2 3.0% Sheung Wan $41.5 $45.8 $48.6 $50.4 $54.8 8.6% tsim Sha tsui $33.0 $34.7 $36.3 $39.8 $42.7 7.4% kowloon east $20.8 $22.9 $24.5 $27.0 $28.8 6.5% overall $48.5 $53.3 $57.9 $65.2 $67.8 4.0% Source: Colliers growth tapering off were popular during the period. Despite the Despite the sustained positive hiring expectations usual age and building management factor, a and buoyant leasing demand for office, more number of 2-tier developments in central saw occupiers have shown their resistance to current an encouraging rental growth of more than 10% market rentals. for example in central, the market during the period. activity was relatively quiet for buildings fetching above hk$120 per sq ft per month. according to suB-markets in kowloon were our research, the pace of rental growth tapered off the performers significantly from about 13% quarter-on-quarter on a comparative basis, the sub-markets in (QoQ) in 1Q 2011 to 4.0% QoQ in 2Q 2011. kowloon including tsim Sha tsui and kowloon east delivered the better rental performance than 2-tier Buildings taking up the the traditional business districts on hong kong slack island during 2Q 2011. thanks to the expansionary in central, the average rental growth was 2.9% requirements and upgrading demand among a QoQ in 2Q 2011 which was a significant slowdown number of medium size enterprises, average compared with 12.6% QoQ registered in the rental in tsim Sha tsui and kowloon east preceding quarter. although rental growth was increased 7.4% QoQ and 6.5% QoQ respectively slow in the top-tier developments, individual during 2Q 2011. buildings with asking rentals 20-30% below the average of the whole of central/admiralty rental forecast the prospective pace of rental growth is anticipated to taper off further in the next 12 GRADE A OFFICE RENTAL TREND months, after having an accumulated rental growth of 65% in the past two years. although $90 individual top-tier buildings in central are $80 predicted to see slowing growth, positive demandEffective Rents (HK$ / sq ft / Month (Net Floor Area)) 69.4 67.8 spillover from central is expected to benefit its $70 adjacent business districts such as Wanchai/ $60 causeway Bay. overall, upgrading and expansion $50 demand are predicted to push average rental upward by another 15% over the next 12 months. $40 $30 $20 $10 $0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Source: Colliers colliers international | p. 7
  • 8. hong kong | 2Q 2011 | office investment Market market volume in other locations such as Wanchai/causeway Despite the fact that the average cost of real Bay and Sheung Wan where office rentals have estate financing in 2Q 2011 was more expensive yet to fully catch up with that in central. in 2Q than in the previous quarters, prospective buyers 2011, Skyline commercial centre, Sheung Wan remained keen in acquiring office assets for long- was sold to a real estate investment fund for term investment. Buoyed by the buying interests hk$390 million. the transaction demonstrates for offices in both the core and decentralized that grade B office buildings in fringe central locations such as kowloon east, the total value locations have been increasingly appealing to of investment sales transactions (i.e. lump sum foreign real estate investment funds. the same transactions of hk$30 million or above) reached also happened on the kowloon side. a total of hk$6.8 billion during 2Q 2011. although there 10 office floors at millennium city 3, kwun tong was a mild retreat from the level of 1Q 2011, were acquired by aeW – a foreign real estate the total volume continued to sustain above its investment fund based in the US, for a total historical average of hk$5.5 billion per quarter. consideration of hk$510 million. it signifies quality offices assets in non-traditional business locations such as kowloon east are also attractive investment rationale to long-term investor not-withstanding the fact as usual, the volume of sales transactions in that end-users and local buyers continue to core locations remained strong since investors dominate the show.MG Tower - 133 Hoi Bun Road Source: Colliers were generally positive on the prospective rental growth in central/admiralty where rentals have office yields been buoyed by the encouraging growth in the banking and finance industries. Strata-titled in line with our original expectations, the growing prices for popular developments saw a capital buying interests for the grade B office assets gain of 15 to 20% during 2Q 2011. in central, sent the average yield to a new low of 3.1% as transacted prices at 9 Queen’s road central, of april 2011. the interesting point is that the central went up to the range of hk$25,000 – yield of grade B offices was in par with that 28,000 per sq ft during the period. in admiralty, in the grade a sector which is used to fetch transactions were also hectic. for example, an average premium of 85 bps. in addition to prices at Lippo centre went further up to about the potential rental catch up, grade B market hk$18,000 – 20,000 per sq ft during 2Q 2011. a has been increasingly active in terms of market sub-divided unit at tower ii saw a price growth liquidity, particularly after the introduction of the of 29% when the unit was resold within a period “Special Stamp Duty” by the government on the of six months. residential market in november 2010. Looking forward, the yield differentiation between grade in view of the fast-rising prices in core business a and B will continue to be marginal over the districts, a group of buyers turned to buildings near to medium term. HONG KONG OFFICE INVESTMENT YIELDS HONG KONG OFFICE INVESTMENT SALES TRANSACTIONS 10% 16 9% 14 8% 12 7% Total Turnover (HK$ billion) Yield (% per annum) 6% 10 5% 8 4% Historical Average: HK$5.5 billion 6 3% 2% 4 1% 2 0% Jan-09 Jan-98 Jan-99 Jan-06 Jul-09 Jan-10 Jul-98 Jul-99 Jan-00 Jan-03 Jan-04 Jan-05 Jan-07 Jul-10 Jul-00 Jan-01 Jul-05 Jul-06 Jul-07 Jan-08 Jul-08 Jan-11 Jul-01 Jan-02 Jul-03 Jul-04 Jul-02 Jul-11 Jan-12 Jul-12 0 3Q 2009 4Q 2009 3Q 2006 4Q 2006 3Q 2007 4Q 2007 1Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 1Q 2010 3Q 2010 4Q 2010 2Q 2010 1Q 2011 2Q 2011 1Q 2004 3Q 2004 4Q 2004 2Q 2004 1Q 2005 3Q 2005 4Q 2005 1Q 2006 2Q 2005 2Q 2006 1Q 2007 2Q 2007 2Q 2008 Grade A Grade B Source: Rating and Valuation Department, HKSAR Government; Colliers Note: Source: EPRC Investment sales transactions with lump sums of HK$30 million or abovep. 8 | colliers international
  • 9. hong kong | 2Q 2011 | officeMarket outlook 512 offices inoverall, the local grade a office market is going to forge further head over the next 12 months 61 countries onbut the pace of growth momentum will taper off. in central, rental affordability is going to be anissue among a number of occupiers. although the overall demand fundamentals remain solid, the 6 continentsprospective rental growth in central is predicted to be capped at 15%. United States: 125 canada: 38fringe business districts and decentralized areas are going to perform with better-than-average Latin america: 18rental growth due to the demand from upgrading and expansionary requirements among the asia Pacific: 214 emea: 117existing tenants in the sub-markets. on the supply front, the projected vacancy will be edging upfrom the current level of 4.6% to test its historical average of 5% upon the completion of another • $1.5 billion in annual revenue in 2010two developments in the second half of 2011. on the demand front, individual buildings in central • 979 million square feet under managementare anticipated to take a breather, since occupiers have shown resistance to current rentals for • over 12,500 professionalstop-tier buildings.however, with an anticipated growth of grade a office rentals in the order of 15% in the nextmonths, investors remain keen to acquire quality office assets for long-term investment. more colliers international (hong kong)prospective buyers will start looking at opportunities available in the grade B market. meanwhile, limited:quality assets in the fringe business districts and decentralized areas will be favoured by a wide Suite 5701 central Plazarange of investors. more buyers will be jumping onto the bandwagon when they are convinced of 18 harbour road Wanchaithe better than average rental growth. hong kong tel +852 2828 9888 fax +852 2828 9899 company Licence no: c-006052 GRADE A OFFICE RENTAL TREND $90 $80 Effective Rents (HK$ / sq ft / Month (Net Floor Area)) 69.4 67.8 richard kirke $70 managing Director | hong kong $60 tel +852 2822 0699 fax +852 2107 6047 $50 email richard.kirke@colliers.com $40 simon lo $30 executive Director | research & advisory | asia $20 tel +852 2822 0511 fax +852 2868 5275 $10 email simon.lo@colliers.com $0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Oct-08 Jan-09 Apr-09 Oct-09 Jul-08 Jul-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Colliers copyright © 2011 colliers international. the information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. no responsibility is assumed for any inaccuracies. readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. accelerating success.www.colliers.com