Colliers Radar Hong Kong Office 14 February Rediscover Kowloon East Searching for the best-fit space in a fast developing market

Transcription

1 Colliers Radar Hong Kong Office 14 February 2017 Rediscover Kowloon East Searching for the best-fit space in a fast developing market

2 Daniel Shih Director Research, Hong Kong Kowloon East, the CBD2 of Hong Kong, has become the preferred choice for many MNCs and SMEs looking for consolidation or relocation space to achieve cost savings. New offices with improved infrastructure and better amenities will continue to enhance Kowloon East's appeal to potential tenants.tenants should take advantage of a wide range of office space options in Kowloon East to match their own strategy. Companies looking for a longterm solution may consider owneroccupation to hedge against future rent rises and enjoy capital appreciation. For landlords, competition for quality tenants will become fiercer with a high new supply of Grade A offices. Flexibility on rent and non-monetary incentives will be critical to attract and retain target tenants in a competitive leasing market. Executive Summary The Grade A office market has always been dominant in Central/Admiralty mostly because MNCs and PRC companies are willing to pay a premium to retain a foothold and enjoy its unique prestige status. However, ever-rising rents have put the purchasing power of top tenants to the test and companies requiring new office space have to look for alternative locations. Kowloon East has been going through profound changes since the relocation of the Kai Tak International Airport and is now in the process of developing into Hong Kong's CBD2. Gone are the old, shabby industrial factory buildings used to house manufacturing and logistics operators. New jobs from high value services sectors, i.e. finance/insurance, professional services, ITC, and real estate related jobs, have flourished in the district. Since the new millennium, Kwun Tong has added 100,000 new jobs, representing 47% growth, compared with 22% for overall Hong Kong during the same period. The percentage of high value service industry jobs out of total employment in Kowloon East has also increased from 17% to 32% since At the same time, office supply in Kowloon East has been growing rapidly. In contrast to Central/Admiralty, Kowloon East offers a much wider range of office options. In addition to Grade A and Grade B buildings, there are still sizable I/O buildings, industrial buildings, and newly revitalised office buildings. For MNCs and SMEs looking for office space consolidation or large-scale relocation from core-cbd, finding the best fit space could be difficult given the choices of office stock on the market. They need to learn more about the characteristics of each office building to match their specific requirements when formulating their real estate strategies. For landlords, the market will become even more competitive given a large volume of new supply. Landlords have to be more proactive in pursuing target companies and be willing to offer more flexibility in lease terms and non-monetary incentives. Office rent in Kowloon East will be under pressure in the coming year due to large volume of new supply. We are confident that Kowloon East will become a prominent business district of Hong Kong with the improvements in external and internal accessibility, good quality office stock, and better amenities following the redevelopment of the Kwun Town centre. Stable property value also offers the opportunity for a company to become an owner-occupier and reap savings from future rent increases as well as enjoy capital appreciation. For other decentralised locations, Colliers expects Wong Chuk Hang to become the most popular choice for tenants choosing to remain on Hong Kong Island. Since the launch of the new MTR South Island Line at the end of 2016, rental activities have been picking up and office rent is expected to increase rapidly.

3 Contents Executive Summary... 2 Development since the Millennium... 4 Mapping out Kowloon East... 8 Performance of Grade A Office Profile of key business sectors Future Outlook for Kowloon East Office Rent Outlook Searching for the best-fit space Getting the right tenant portfolio Wong Chuk Hang - a good alternative Conclusion Rediscover Kowloon East 14 February 2017 Office Colliers International

4 Development since the Millennium Since the relocation of the Kai Tak Airport in 1998, the Kowloon East area, comprising Kai Tak, Kowloon Bay, and Kwun Tong, has been going through profound changes. Logistics and manufacturing operations that used to be dominant inthe industrial heydays in the area, have gradually been replaced by new services sectors such as banking, insurance and professional services. It was not until the 2011 Policy Address and various Government initiatives in following years that Kowloon East has started to go through a more co-ordinated transformation from a major industrial district to become the second CBD of Hong Kong (CBD2) involvinga land use review, enhanced urban design, and improvement in accessibility and the associated infrastructure. Looking back, the government s visionary plan for Kowloon East was timely as the existing CBD in Central had already been fully developed with very low new supply. Without major office redevelopment, Hong Kong will not be able to accommodate new demand for office space and will lose out to our regional competitors. New Grade A office supply in Kowloon East has created additional room to expand MNC's operations in Hong Kong. However, the existing urban infrastructure, particularly the vehicular transport network, the pedestrian walkways, and parks and recreational open space, requires further improvements in order to meet the modern CBD district standards. Chart 1: Kowloon East Office Sub-market Snap Shot 2 nd Largest Office Market 47% Job Growth since Grade A Buildings 12.4M Sq ft Grade A 4 Rediscover Kowloon East 14 February 2017 Office Colliers International

5 Infrastructure Developments to Support CBD 2 Initiative With the decommissioning of the old Kai Tak airport, new initiatives were put in place to revive the Kowloon East area. Upon the formal announcement made in the 2011 Policy Address to transform Kowloon East into the Second Central Business District in Hong Kong, there have been a number of initiatives to support that. There are five major infrastructure projects with direct impact on Kowloon East. The establishment of the Kai Tak Cruise Terminal has put Kowloon East back on the modern map, shifting the perception of Kowloon East area from an old industrial area to a modern tourist hub. Kwun Tong Waterfront Promenade development completed in 2015 has transformed Kwun Tong's industrial waterfront into an attractive waterfront destination in Hong Kong. As per planned projects, the Sha Tin to Central Link will connect Sha Tin from the New Territories directly to Central CBD. The proposed MTR line going through Kai Tak will greatly improve the connectivity between the CBD and Kowloon East. The line is expected to be completed by year To improve the inter-district connectivity in Kowloon East, the government has proposed an Environmentally Friendly Linkage System that will run across Kowloon East. A feasibility study is currently underway and the project is planned for completion in Lastly, Kai Tak Fantasy concept is a plan to transform the Kwun Tong Typhoon Shelter into a tourism node including entertainment, leisure and other commercial activities. The development will have a total GFA of 2.5 million sq ft(0.23 million sq m). The Industrial building revitalisation scheme from 2010 to 2016 helped transform many of the Kowloon East's old industrial buildings into modern office buildings Shatin- Central Link 9Km/12 Stations EFLS 5 Rediscover Kowloon East 14 February 2017 Office Colliers International

6 Job Growth The employment growth rate and the mix of employment opportunities demonstrate that Kowloon East s job base has changed dramatically between 2000 and Since the new millennium, Kwun Tong has added 100,000 new jobs, representing a 47% growth, compared with 22% for overall Hong Kong during the same period. (Chart 1). In addition, high value service jobs from Finance/Insurance, Real Estate, Professional Services, and Information & Communication sectors, have been growing rapidly in Kowloon East between 2000 and 2015 (Chart 2). The percentage of high value service industry jobs out of the total employment in Kowloon East has also increased from 17% to 32% since In parallel, companies from high value service sectors have taken over import/export as the largest group of employer in Kowloon East in Chart 1: Employment Growth of Kowloon East & overall Hong Kong between 2000 and 2015 Source: Census & Statistics Department Chart 2: Employment by Industry Sector - Kowloon East (2000 vs 2015) 7% 3% 2015 Finance/Insurance 2% 2% 8% 35% 5% 18% Real Estate 42% 2000 Professional/Business Services 5% Information & Communication 41% Import/Export, Wholesale Others 32% Source: Census & Statistics Department 6 Rediscover Kowloon East 14 February 2017 Office Colliers International

7 Office Supplies. Compared with Central/Admiralty, Kowloon East provides a wider selection of office spaces comprising Grade A, Grade B, I/O buildings and revitalised office buildings due to its historical background as an old industrial district. At present, Kowloon East still has the largest industrial space supply in Hong Kong. Chart 3: Office Categories split - Kowloon Revitalised East Office I/O 5% 17% Grade A office: constitutes the largest share of office space, most of the Grade A offices have been built since 1999 Grade B office: represents a small section of the overall office market Grade B 6% I/O buildings: popular between 1980 and 1990, I/O buildings were built to suit both industrial and office purposes with a total GFA of 2.5 million sq ft (0.23 million sq m) Grade A 72% Revitalised office: referring to old industrial buildings refurbished into new office buildings, representing 1.35 million sq ft (0.12 million sq m) GFA in 2017 Table 1: Office Characteristics by Categories - Kowloon East Grade A Grade B I/O Building Revitalised Office Typical Floor Plate 12,000-30,000 sq ft 5,000-15,000 sq ft 5,000-15,000 sq ft 3,000-20,000 sq ft Key Building Features Central A/C system Car park provision Experienced property management High ceiling Sizable floor plate Split-type A/C Concrete floor Subdivided units Split-type A/C Concrete floor Subdivided units Split-type A/C (in general) Lower ceiling height Concrete floor Low efficiency limited natural lighting light well installation Meeting room /store room installation Management Services Premium quality Average quality Average quality Average quality Landlord Provision Raised floor system False ceiling Lighting panels False ceiling Lighting panels False ceiling Lighting panels False ceiling Lighting panels Carpet Raised floor (for quality revitalised office) Major Tenant Groups MNCs Banking & Finance Insurance Semi-retail SMEs SMEs MNCs SMEs Semi-Retail 7 Rediscover Kowloon East 14 February 2017 Office Colliers International

8 Mapping out Kowloon East Chart 4: Office Categories Distribution - Kowloon Bay Business Area Kowloon Bay Business Area Compared with Kwun Tong, Kowloon Bay has a smaller amount of Grade A office stock. According to Colliers' classifications, there are eleven Grade A office buildings that accounts for 5 million sq ft (0.46 million sq m) (NFA) of office space, four Grade B office buildings accounts for GFA 1.75 million sq ft (0.16 million sq m) (NFA) and one revitalised office building. Regarding future supply, between 2017 and 2020 there are three projects that will add a net floor area of 1.1 million sq ft (0.1 million sq m) of Grade A office space. Regarding amenities in the neighbourhood, Kowloon Bay International Trade & Exhibition Centre is a major venue for exhibitions and an alternative for Wan Chai's Convention and Exhibition Centre. Telford Gardens, a sizable shopping mall, is located right next to the Kowloon Bay MTR station. In addition to the above future projects, there are also plans to build a multi-functional complex at the "Action Area One". The plan put forward for consultation suggests a total development with a gross floor area of 5.3 million sq ft (0.49 million sq m). The plan includes Office (57.6%), Retail/F&B/ Entertainment (23.5%), Hotels (14.9%) and other usage. The site is also planning to host one of the EFLS stations connecting Kowloon Bay to other areas in Kowloon East. Kowloon Bay is relatively distant from the existing MTR station. However there are plans underway to improve the connectivity via elevated walkways connecting office buildings within the area. The government has identified eight potential links and is in the process of incorporating them into the outline development plan for the area. 8 Rediscover Kowloon East 14 February 2017 Office Colliers International

9 Kwun Tong Business Area Kwun Tong Business Area has a larger office supply than Kowloon Bay, comprising a total of 7.4 million sq ft (0.68 million sq m) of Grade A office space as of The area also contains Grade B buildings with a total of 0.7 million sq ft (0.06 million sq m) and revitalised office buildings with a total of 0.9 million sq ft (0.08 million sq m) respectively. It is also served by two MTR stations, increasing the accessibilty to the area. Kwun Tong is particularly popular for banking and insurance occupiers who were previously already well established. Several companies, such as Citicorp and Manulife, have invested in new en-bloc offices with large floor plate to consolidate their operations in Hong Kong in recent years. In addition, between 2017 and 2020 there will be six new office developments in Kwun Tong, accounting for about 4.3 million sq ft (0.4 million sq m) office space. The main key disadvantages of Kowloon East have always been its poor road traffic circulation, the lack of quality retail amenities, F&B, and other activities to attract top-tier companies. The situation should improve with the completion of two new major developments: Kwun Tong Town Centre redevelopment project will deliver 4.3 million sq ft (0.4 million sq m) of floor area which will include 2.3 million sq ft (0.21 million sq m) retail space and 0.3 million sq ft (0.03 million sq m) for government facilities Kwun Tong Action Area near Kwun Tong Ferry Pier still does not have a concrete development plan. However, we expect it will be a mixed used development similar to that of Kowloon Bay Action Area with a greater portion of commercial space Kwun Tong area also has three 4-star hotels to support the growing business community. Chart 5: Office Categories Distribution - Kwun Tong Business Area 9 Rediscover Kowloon East 14 February 2017 Office Colliers International

10 Performance of Grade A Office Among all office categories, the Grade A office space has had the most significant increase since Over the next 5 years, we expect that an additional 4 million sq ft of Grade A office space will be completed. By 2020, Kowloon East will have the second largest Grade A office supply in Hong Kong with a total of Grade A office space exceeding 15 million sq ft(1.39 million sq m). The office building rents vary greatly depending on the age of the building, ownership structure and locations. We also believe that stratified office buildings built prior to 2012 and without any direct access to MTR will face the highest adjustment pressure to their rental level in Chart 6: Rent & Vacancy of Offices Built before and after 2012 Rent & Vacancy Due to the recent new supply, the vacancy rates of buildings completed during the past 5 years have been much higher and their rents lower than buildings completed prior to Given the upcoming stream of new supply, the current rent of older office buildings will not be sustainable and landlords will have to undertake building enhancement works in order to remain competitive in the market. Chart 7 Office Rent by Ownership Ownership Structure Nearly 60% of office spaces are single-ownership buildings in Kowloon East and they have always been able to charge higher rents than the stratified buildings. However, since 2013, rents of single ownership buildings have been decreasing gradually. In contrast, rents of stratified office buildings have continued to rise during the same period and even overtook single-ownership buildings in we believe rents of stratified office buildings will face more adjustment pressure. Accessibility Offices within 250 meters walking distance from a MTR station are considered to have a direct MTR access, and those offices can therefore charge a higher rent of i.e. HKD5 per sq ft (USD0.65) on average. The rent difference for direct and in-direct MTR access for individual buildings could be up to HKD10 per sq ft(usd1.3). Chart 8: Office Rent by Accessibility 10 Rediscover Kowloon East 14 February 2017 Office Colliers International

11 Profile of Key Business Sectors Major occupiers of different service sectors have moved part of their operation to Kowloon East. Table 2 provides a number of selected key tenants in the area from different industry sectors. In addition to leasing, some of the leading finance and insurance institutes have already purchased office properties in Kowloon East. We expect the office value to remain stable in Kowloon. Table 2: Selected Leading Tenants in Kowloon East Industry Key Tenants Building Occupied Space Sub-district CCB CCB Centre 396,000 Kowloon Bay Standard Chartered Bank Millennium City 1 100,000 Kwun Tong Banking Citibank Citi Tower 480,000 Kwun Tong Bank of East Asia Millennium City 5 350,000 Kwun Tong ICBC Millennium City 1, Tower 1 117,000 Kwun Tong SmarTone Mobile Millennium City 2 135,000 Kwun Tong Siemens Manulife Financial Centre 63,000 Kwun Tong Information & Technology Ricoh One Kowloon 66,000 Kowloon Bay Avnet Enterprise Square Five 68,000 Kowloon Bay CSL Octa Tower 32,000 Kwun Tong Manulife Manulife Financial Centre 316,000 Kwun Tong Insurance Prudential Millennium City 1, Tower 1 69,000 Kwun Tong AIA AIA Kowloon Tower 169,000 Kwun Tong AXA AXA Tower 197,000 Kwun Tong DHL International Enterprise Square Five 118,000 Kowloon Bay CMA CGM Manulife Financial Centre 64,000 Kwun Tong Logistics and Shipping Kuehne & Nagel Manhattan Place 46,000 Kowloon Bay OOCL One Harbour Square 55,000 Kwun Tong ZIM Integrated Shipping Pioneer Place 42,000 Kwun Tong PwC Manulife Financial Centre 200,000 Kwun Tong Professional Services WSP One Kowloon 99,000 Kowloon Bay JEC Manulife Financial Centre 70,000 Kwun Tong Jardine OneSolution Millennium City 1, Tower 1 62,000 Kwun Tong Gap Millennium City 5 77,000 Kwun Tong PVH One Kowloon 46,000 Kowloon Bay Hugo Boss Millennium City 6 41,000 Kwun Tong Sourcing Ralph Lauren Manhattan Place 46,000 Kwun Tong Nike Exchange Tower 82,000 Kowloon Bay Esprit Enterprise Square Three 57,000 Kowloon Bay adidas Hong Kong AIA Kowloon Tower 50,000 Kwun Tong 11 Rediscover Kowloon East 14 February 2017 Office Colliers International

12 Future Outlook for Kowloon East With increasing supply of quality office space of around GFA of 5.6 million sq ft (0.52 million sq m) for the next three years, Kowloon East has established itself as the second CBD for Hong Kong. The latest policy initiatives and development proposals from the Government and private developers will further enhance its status as a vibrant and diverse business district offering affordable rent for all business sectors. Chart 10: Key Development Initiatives in Kowloon East 12 Rediscover Kowloon East 14 February 2017 Office Colliers International

13 Office Rent Outlook Grade A office rent for Kowloon East has been less volatile when compared to core-cbd areas in the past 5 years. In addition, rent at Grade B and I/O buildings were also very stable. For revitlised office, rents will reflect the quality of the revitalisation scheme undertaken by the Landlord. Chart 11: Rent & vacancy by office categories In our previous 5-year Grade A office rent projection, we estimate that rent in Kowloon East will trend downwards between 2017 and At the same time, with a rising office rent in the core-cbd area, we expect the rental gap between Central/Admiralty and Kowloon East will widen further. As a result, more companies from core CBD will consider Kowloon East for consolidation or relocation in future, which will prevent the rent from experiencing significant adjustments. Chart 12: Office Rent Projections (HKD/Sqft) Source: Colliers International 13 Rediscover Kowloon East 14 February 2017 Office Colliers International

14 Searching for the Best-fit Space As mentioned in previous sections, Kowloon East offers a wide range of options for companies looking for the right office space. We have identified key business sectors which have rapidly expanded in Kowloon East in the last few years. Based on our experience, different business sectors have distinct preferences for office spaces, some factors are considered to be more important than office rent. In Tables 3a-b, we have highlighted the office preferences by sectors and Collier's recommended strategy that best meet their requirements. Banking/Finance: with a growing presence in Kowloon East, this sector has been seeking back office space and is interested in naming right of buildings or is seeking property investment potential. Since many staff are relocating from core CBD areas, companies need to pay more attention to the human factors, i.e. a workplace strategy involving a long-term planning and the integration of soft elements in the process are critical for staff retention Insurance: according to Colliers' record, insurance companies occupying 5.6 million sq ft (0.52 million sq m) of office space in Hong Kong and Kowloon East has the largest share with 30%. Manulife, AXA and AIA already have a significant presence in Kwun Tong area. Many insurance companies use their offices for both sales and back office functions; convenient access to MTR stations is a very important factor Professional Services: professional services in Kowloon East are mostly involved in marketing, design, engineering and IT services are very cost sensitive. When comparing office rent, these companies tend to invest more in office design to create a more staff-friendly working environment Sourcing: a fast developing sector and very price sensitive to rent. The availability of quality office has attracted leading retailers including adidas, Carrefour, Kingfisher and Gap to set up their sourcing office in Kowloon East. In the last 3 years, new leases by sourcing companies have exceeded 300,000 sq ft(27,900 sq m). In addition, many smaller sourcing companies have been the targets of M&A activities and had to relocate from Grade B to Grade A office as a result of consolidation Table 3a Colliers' Strategy based on Business Sectors' Preference for Office Space Banking/Finance Insurance Professional Services Sourcing Typical Space Requirements (sq ft) Preference Recommended Strategy Affordable Rent (Net Effective per sq ft) 10,000-50,000 10, ,000 10,000-60,000 5,000-50,000 Naming right Open for en-bloc investment options Space for training centre/back office Strong preference for Grade A offices along Kwun Tong Road Approach Grade A office with trading floor and large floor plate (15,000-30,000 sq ft) Seek rental discount for sizable requirement Looking for offices with similar tenants Offering convenient transport to main office Naming right Sales/back office Preference for offices along Kwun Tong Road for greater convenience Approach Grade A office at prime locations Target large floor plate offices (15,000-30,000 sq ft) Consider long term plan with further consolidation in future Seek rental discount for sizable requirements Main office uses, with some training centre/back office Grade A/B office Quality revitalised office an option Be flexible on building requirements Close to hotels Investing in a good workspace design is a more important consideration than rent to attract and retain staff To consider owneroccupier for long term savings in rent Mid to back office uses Price sensitive Longer lease term with stable rent Close to hotel Looking for cost saving options Quality revitalised buildings are options New Grade A office if relocating from outside districts Renewal with current landlord is a better option for existing companies HK$ HK$ HK$25-50 HK$ Rediscover Kowloon East 14 February 2017 Office Colliers International

15 Shipping/Logistics: in 2015 and 2016, the market recorded 180,000 sq ft (16,700 sq m) new letting transactions from the shipping and logistics industry. The tenant mostly relocated from Eastern Hong Kong Island due to the significant rental gap. The industry is still going through further optimisation and is very cost sensitive to rent. Business Centre: the serviced office business industry has grown quite rapidly in the past years and covered a large range of buildings. Operators like Regus and Jumpstart chose the Grade A office building in Kwun Tong to provide premium services. Grade B office and revitalised building also became the alternatives for operators targeting price sensitive clients. Flexible workspaces have been taking a bigger market share in Hong Kong and some operators are actively looking for suitable revitalised office buildings in Kowloon East. SMEs: many are moving from obsolete office buildings in core area to Grade A office buildings in Kowloon East. In general, they are flexible about locations but are more concerned about a long term stable rent. Some of them have invested in Grade B office and become owner-occupiers. Semi-Retail: Kowloon East offers a great opportunity to grow their businesses. Landlords of single ownership office buildings usually do not prefer semi-retail occupiers, which makes the stratified office a viable option for them. They are location sensitive, i.e. buildings connected to MTR and a continuous flow of foot traffic would be the key for semi-retail tenants. Table 3b Colliers' Strategy based on Business Sectors' Preference for Office Space Shipping/Logistics Business Centre SMEs Semi-Retail Typical space requirements (sq ft) 20,000-30,000 8,000-12, , ,000 Main office Very cost sensitive for both renewal and relocation Tenant mix: preferred to cluster with other shipping/ logistics operators Preference Location sensitive Long lease term and stable ownership Decent floor plate size, at 10,000 sq ft Stratified Grade A office Grade B office I/O Buildings Revitalised office Location sensitive Accessibility to continuous foot traffic Recommended Strategy New Grade A office offers more cost saving options for relocating client Renewal with current landlord a better option for existing occupiers Flexible lease term Sea view will be a value-added feature Approach revitalised offices for coworking space Target new/high vacancy buildings with precommitment Seek a stable rent arrangement Consider owneroccupier opportunities Landlord specific Target customers are aligned with the surroundings Flexible in lease terms Creative rental package, i.e. profit sharing Affordable Rent (New Effective per sq ft) HK$20- $40 HK$25-50 HK$20-30 HK$ Rediscover Kowloon East 14 February 2017 Office Colliers International

16 Getting the Right Tenant Portfolio Based on the current market sentiment, rent and vacancy rate across all categories, we believe there are areas that landlords in Kowloon East need to improve in order to attract and retain their target tenants. Given a very competitive market in the coming year, landlords have to be flexible with non-monetary incentives, respond quickly to good tenants, and be prepared to offer longer-term leases. Grade A Office (Single Ownership): Respond quickly to target tenants Offering longer lease/naming rights Better non-financial terms to selected large occupiers, such as capex allowance Grade B Office: Retaining existing clients is a priority as Grade A office is offering more incentives Competitive rental to attract tier 2-3 companies Consider open to semi-retail operations Upgrade their common facilities I/O Office Competitive rental Upgrade their common facilities Proactive in identifying and pursuing tier-one companies Grade A Office (Stratified Ownership): Be more aggressive in pursuing good tenants Offering more rent and non-monetary incentives in a very competitive market Revitalised Office Quality upgrades critical for targeting different groups of tenants Adding shops and restaurants/better amenities is the key to attract quality tenants Be more flexible on lease terms and lower management fees Table 4 Colliers' Recommendations for Landlords Target tenants Grade A Grade B I/O Revitalised Office MNCs SMEs/Semi-Retails SMEs/Tier 2-3 companies MNCs Do s Stable rental policy Long lease term Providing nonmonetary benefits: Sharing right First right of refusal Rental cap Capex allowance Carpark Install on site show suite Flexible and competitive rental package Providing licence period, rent free period Full landlord provision and fit-out Open to semi-retail clients Install onsite show suite Flexible and competitive rental package Providing licence period, rent free period Full landlord provision and fit out Install on-site show suite Improve building facilities: Natural lighting Upgrade office lobby Property Management Full land lord provision Install on-site show suite 16 Rediscover Kowloon East 14 February 2017 Office Colliers International

17 Wong Chuk Hang - a Good Alternative Wong Chuk Hang area has emerged as a new satellite office district offering a similar rent to Kowloon East. With the opening of the MTR South Island Line, the commute time between Wong Chuk Hang and core-cbd area has been greatly reduced. The area has become a popular cost savings choice for companies with a strong preference for Hong Kong Island. Office Stock & Future Supply Grade A office supply has increased gradually since 2011 and will exceed 3 million sq ft (0.28 million sq m) by However, we do not expect the total office stock to grow much bigger than that. In addition, most of the office buildings have a floorplate less than 10,000 sq ft per floor, which is too small for MNCs intending to consolidate their operations. Rent & Vacancy Rent at Wong Chuk Hang has been growing steadily and the latest net effective rate is HKD32.7 (USD4.2) per sq ft, representing an annual growth of 21%. Due to new supply and the delayed opening of MTR service, the vacancy rate has been high at 27% by the end of However, we have seen a stronger interest following the opening of MTR service and we expect both rent and occupancy rate to increase significantly in the short-term. We believe future rent level at Wong Chuk Hang to be close to Quarry Bay, which is currently 50% higher. Major Business Sectors Wong Chuk Hang area has been popular among fashion and design companies, which have formed a major business cluster in the area. In addition, finance, insurance and professional services have started to view Wong Chuk Hang as an alternative destination. Future Outlook The office market in Wong Chuk Hang will experience a fast growing period following the commissioning of MTR service. However, the lack of large floorplate office buildings and limited room for further expansion will restrain Wong Chuk Hang from developing into a major office market for Hong Kong. We believe the area will be more attractive to the fashion and design industry and to medium size professional service businesses. Conclusion Many businesses will look at Kowloon East as an alternative location in their next office renewal cycle. With continuous improvements of infrastructure, new quality office space, better amenities, and affordable rent, we believe that Kowloon East's will emerge as a true prominent office district in Hong Kong where both MNCs and SMEs can be recognised. Given the large amount of office stocks, tenants need to assess long-term needs and formulate their own CRE strategy in additional to rent. For example, owneroccupier would be a viable option for companies preferring a more stable environment for their operations. Other companies may consider that workspace design to be a more important consideration than rent as they need to retain and attract the top-tier talents in their industry. For landlords, with additional new office supply in the coming years, the rental market will be very competitive. Landlords will have to be more proactive in pursuing target tenants and be ready to offer flexibility in both monetary and non-monetary incentives. More businesses are asking for longer-term leases in order to maintain an affordable rent level in future. Building enhancements will be very important for landlords to retain their existing tenants, especially for newly completed buildings offering a similar level rent. Adding new F&B, retail, and entertainment venues will also be important. Kowloon East offers opportunities for investors who are looking for long-term positive returns. The office value has not gone up as much as Central/Admiralty in recent years. However, looking ahead, with a more matured business district, the value of office property will increase in the medium to long term. Although we are positive about the medium to long term prospect for Kowloon East, any postponement of infrastructure development and Government initiatives will delay progress. Tenants will choose other decentralised locations with better amenities. As a result, landlords will face more pressure in a growingly competitive market and rent may go through a long period of adjustment. 17 Rediscover Kowloon East 14 February 2017 Office Colliers International

18 554 offices in 66 countries on 6 continents United States: 153 Canada: 34 Latin America: 24 Asia Pacific: 231 EMEA: 112 $2.5 billion in annual revenue 2 billion square feet under management Colliers International Hong Kong Suite 5701 Central Plaza 18 Harbour Road, Wanchai Hong Kong ,000 professionals and staff About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ & TSX: CIGI) is an industry leading global real estate services company with more than 16,000 skilled professionals operating in 66 countries. With an enterprising culture and significant employee ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include strategic advice and execution for property sales, leasing and finance; global corporate solutions; property, facility and project management; workplace solutions; appraisal, valuation and tax consulting; customized research; and thought leadership consulting. Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice that help clients accelerate their success. Colliers has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals Global Outsourcing for 11 consecutive years, more than any other real estate services firm. colliers.com Copyright 2017 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.