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News Release

Hong Kong

Jones Lang LaSalle: Recovery in Grade A Office Leasing Market Drives Up Rental in 1Q10 


The pace of recovery in the Grade A office leasing market continues to increase. The largest net take-up in a quarter since 1Q08, a total of 906,198 sq ft (net) was registered in the quarter, according to Jones Lang LaSalle’s press briefing today for the office market update in 1Q10.
 
There was a notable pick-up in activity in the leasing market as companies sought expansion opportunities. In the largest leasing transaction on Hong Kong Island thus far for 2010, Jones Lang LaSalle arranged for Sun Hung Kai Securities to lease six floors (97,000, sq ft lettable area) from The Hysan Development Company Limited  in The Lee Gardens to consolidate and expand its four offices from Admiralty. This transaction underlined Causeways Bay’ s appeal to major corporations in the finance sector and was one of a number of transactions in the district from the premium end of the business sector during the early part of 2010. This trend is expected to continue as expanding Central occupiers seek Grade A accommodation in other core Hong Kong Island locations with prestige, accessibility and amenities akin to those on offer around their current premises.
 
Meanwhile, the trend of insurance companies relocating away from Hong Kong Island continued in the first quarter. These companies remained as a key tenant group looking for office space in Kowloon East. Manulife expanded in-house by two interlinked floors (130,000 sq ft gross area) in Manulife Financial Center in Kwun Tong, while AIA leased seven and a half floors (about 90,000 sq ft gross area) in International Trade Centre in San Po Kong to relocate its various offices from Hong Kong side. Several other companies from the financial sector are currently looking for space with a requirement of over 100,000 sq ft large floor plate office space in Kowloon East, and these transactions are expected to conclude in the first half of this year.
 
With a total of 754,085 sq ft (net) taken up in 1Q10, Kowloon East continued to lead the pack. Improved occupancy helped push the overall vacancy rate down from 7% to 6.2% q-o-q.  ‘Manhattan Place is expected to be fully leased in the next one to two months, while the vacancy rate of Exchange Tower and Landmark East is expected to drop between 10% and 20% within the first half of this year,’ said Terry Shum, National Director at Jones Lang LaSalle.
 
Q1 2010 (%) 
Q4 2009 (%)
Vacancy Rates (month -end)  
Central  4.5% 4.8%
Wanchai/Causeway Bay  4.6%
5.3%
Hong Kong East 
2.9%
3.1%
Tsimshatsui
6.5%
5.9%
Kowloon East
14.6%
19.9%
Overall
6.2%
7.0%
 
The investment market was highlighted by the en bloc sale of Fortis Tower in Quarry Bay to Hong Kong Housing Society for HKD 1.83 billion and the bulk sale of 10 floors with car parking spaces and naming rights in One Harbour East, Kwun Tong for HKD 1.07 billion. On the back of the rental rebound, low interest costs and tight supply, investors will continue to show interests in Grade A office properties.
 
Billion Development’s 7 Shing Yip Street (222,900 sq ft, net) in Kwun Tong was the only Grade A office development completed in 1Q10. About 80% of the office space in the building was pre-sold prior to its completion.
 
In 1Q10, rental growth accelerated in Central and Wanchai/Causeway Bay, going up 7.5% q-o-q and 3.3% q-o-q, respectively.  The growing competition between Kowloon East and Tsimshatsui led to a slower momentum in these two submarkets. After rising by 1.7% q-o-q in 4Q09, rents in Tsimshatsui remained largely stable, while rents in Kowloon East were up 1% after growing by 4.6% previously.
 
Capital value growth also accelerated across all submarkets, Central was up 7.8%, recording the strongest growth.  
 
Net Effective Rental as at end of 1Q 2010

Rental per sq ft (HKD) 
QoQ Change
Central
73.5 
7.5%
Wanchai/Causeway Bay 
34.9
3.3%
Hong Kong East 
25.7
-0.3%
Tsimshatsui 
29.6
-0.1%
Kowloon East
17.3
1.0%
Overall 
42.8
4.8%

 
Leasing demand has been mainly driven by consolidation and expansion requirements, although there had been signs that PRC companies are looking for new set-up opportunities in Hong Kong. ‘The rest of the first half of 2010 will see companies continue to drive transaction volumes , eager to commit to leases before rents climb higher, or in Central to secure available accommodation as vacancy continues to reduce’ remarked Gavin Morgan, International Director and Head of Markets at Jones Lang LaSalle Hong Kong.
 
‘As rents continue to rise and get closer to their pre-crisis levels, the second half of this year will see companies becoming increasingly cautious and rental growth momentum will likely slow down on a relative basis. However, low vacancy and reduced pressure from expiring leases will maintain the landlords strong position, leaving the market with minimal rental pressure,’ concluded Morgan.