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The tide may be turning for landlords, with prime commercial property in demand again
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Latest data from realtor Colliers International confirms there never has been a better time to take up Grade A office and retail leasing in Hong Kong. First-half figures for 2009 show tenants remain in the driver's seat with prices the lowest in years.
But the downward cycle can't last forever, and already, there are signs of a shift. Over the past few weeks, Colliers has noticed a renewed confidence not seen since before the financial crisis. Earlier this year, the realtor had predicted the Grade A commercial leasing market would bottom in mid-2010, before resuming an upward cycle. Now, says Richard Kirke, Managing Director of Colliers Hong Kong, it could happen much sooner than that.
Mr Kirke says Hong Kong sales activity and price growth have dominated the Asian real estate market in the first half of 2009, even though both the local and global economies had yet to show any sustained improvement. But with increased liquidity now flowing back into the market, he expects capital values to further improve, and rental decline to taper off, in the next 12 months.
The Colliers data shows rentals for Grade A office leasing fell 12 per cent quarter on quarter in the second quarter of 2009, and 24 per cent since the beginning of the year, prompting existing tenants to downgrade their offices and/or relocate from Hong Kong Island to Kowloon in search of cheaper premises. This has opened up a range of options in hitherto tightly held buildings in such prime areas as Central and Causeway Bay.
High Street Hype
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US hedge funds have Hong Kong's financial district in their sights |
These findings from the Colliers mid-year review follow an international survey, released in June, showing that while premier street-front rents in almost every region of the world moved decidedly lower during the past 12 months, the decline in Asia – particularly Hong Kong – was less severe.
In that report, Simon Lo, Director of Research and Advisory, Colliers International Hong Kong, noted the resilience of Hong Kong retail sales. Predominantly, he credited the continued spending by Chinese mainland tourists, numbering more than one million arrivals per month. "Thus, retail rental in the local prime street saw a single-digit drop only in the past year, which was less than those in other countries," Mr Lo said.
He added that some retailers, "particularly those with strong balance sheets," were seizing the opportunity to expand. "They see now as an ideal time to expand into markets or locations previously viewed as too expensive or difficult to penetrate. Luxury retail is sure to make a comeback, if not in the next 12 months, then soon after. The emergence of a sizeable middle class in Asia Pacific, the Middle East and Central and Eastern Europe is to continue, albeit at a reduced rate, but remains a trend that retailers are to watch."
Mr Kirke points out that even though vacancies in prime commercial buildings in Hong Kong have on paper tripled since the pre-crisis peak, the vacancy rate is still only four per cent – up from a near-capacity one per cent. "We are still talking about a fairly limited supply," he says. And most of that supply consists of smaller premises, around 5,000 to 10,000 square feet. "If you want a whole floor, you would still struggle," he says.
Renewed Optimism
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Richard Kirke, Managing Director of Colliers Hong Kong, is seeing new signs of optimism
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What's changed in recent weeks is a jump in business confidence. Mr Kirke believes this was sparked by Goldman Sachs' announcement of a bumper profit in July, the richest quarterly profit in the bank's 140-year history. This, he believes, has led other investment banks to become more bullish about their own profitability. "Banks that had been trying to sub-let some of their own floor space have decided to withdraw their offer, believing they would soon need the space for themselves."
Landlords, too, are similarly buoyed, especially after watching the Hong Kong stock market rise.
"Our leasing teams have already seen a change in just the last couple of weeks, with landlords feeling they are in a stronger position," Mr Kirke says. "There is a general optimism in the market."
Hedge Funds Return
Wendy Lau, Colliers' Head of Commercial Leasing, agrees. "In prime buildings like ifc, we are already seeing rentals going up, and the vacancy rate dropping. This tells us the market in Central is moving," she says. Ms Lau also notes the return of overseas hedge funds. In the past week alone, Colliers has helped five US hedge funds that are looking to establish an office in Hong Kong.
While Hong Kong landlords may now be firmer in their asking price, Mr Kirke says they remained pragmatic, and tenants should still be able to fix rental agreements in their favour.
For those who have been waiting for the "right" time lock into a leasing deal, Mr Kirke's advice is to act sooner rather than later. "The window of opportunity is closing quite quickly to secure these prime properties."
Related link
Colliers International
