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HONG KONG, 17 April 2012 – Office market vacancies fell to its lowest recorded figure in 20 years in March 2012. The overall market vacancy rate reached 3.8% last month, below the 4% recorded when the market peaked in April 2008. Against the backdrop of the 6 million sq ft growth in stock between 2008 and now, this trend highlights the continued demand for space in Hong Kong despite the prevailing slowdown in leasing activity as a result of the global economic uncertainties.
According to Jones Lang LaSalle’s latest research report, the overall market registered a positive net take-up of 697,100 sq ft in 1Q 2012, but this was largely inflated by the realization of pre-committed space in the newly completed Hysan Place and 55 King Yip Road, and the en bloc purchase of 18 Kowloon East by China Construction Bank, which is understood to be mostly for self-occupation. Though Central has registered a negative net take-up in 1Q12, its vacancy rate remains at below the 5% mark, which is a very tight level according to current international standards.
Ben Dickinson, Regional Director and Head of Tenant Representation at Jones Lang LaSalle said: “Demand for office space in Central was driven mainly by small-scale expansions and new set-ups from the legal and finance sectors, with requirements of typically 5,000 sq ft or less. However, demand for Grade A1 quality office space remained relatively weak as larger financial industry occupier activity is limited to some disposal of space in a bid to reduce occupancy costs. This decrease in demand explains why rentals in Central dropped 6.3% in 1Q 2012. ”
However, considerable leasing activity was seen in other sub-markets driven by cost-saving relocations and upgrading requirements from non-Grade A properties. The climb in Central vacancy is offset largely by the continuous drop in Kowloon East vacancy, which is now down to 5.4%. There are currently no submarkets with vacancy rates at above 6%.
The figures indicate that the current market down-cycle differs from past down cycles as there has been no market contraction in the occupier market on a q-o-q basis following the Eurozone crisis last year.
Dickinson explained: “With occupancy generally limited, the majority of landlords are not under great pressure to reduce rents. However, those carrying space are increasingly willing to be more creative with proposed terms to retain or attract key tenants.”
Looking forward, an increasing amount of returning stock will come into the market from the banking and finance sectors, with occupiers in the field adopting a wait-and-see approach to the market, while tenants from the legal, IT, small hedge funds and retail sectors continue to seek quality office space at affordable prices.
The office market fundamentals in Hong Kong remain very healthy despite the fact Central is expected to face continued migration pressure from tenants in the near future. Once the global economic outlook stabilises, rentals are likely to rebound quickly.
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