1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Hong Kong Office MarketView Q1 2013 Global Research and Consulting OVERALL HONG KONG Rents -0.2% q-o-q CENTRAL Rents -1.5% q-o-q HONG KONG ISLAND Rents -0.6% q-o-q KOWLOON Rents +0.8% q-o-q NEW SUPPLY ON THE HORIZON COULD BE TOO LITTLE TOO LATE 1 Hot Topics There are early signs that activity in the CBD is slowly picking up compared with previous quarters. Decentralised districts on both Hong Kong Island and Kowloon continue to receive stronger interest. However, this does not always translate into new lettings as vacancy remains tight in these areas. Rents remain under pressure in core areas on Hong Kong Island. Buildings with large vacant space or upcoming vacancies are still under rental pressure. Outside the CBD, rents continue to grow. Demand for space in Causeway Bay and Hong Kong East has been boosted by tenants seeking to relocate from buildings scheduled for redevelopment. Rents in decentralised Kowloon districts such as Cheung Sha Wan have been outperforming core areas as buildings with low base rents remain attractive for cost conscious occupiers. 2 nd Tier buildings which provide cost effective options in key areas also offer more scope for rental growth going forward. Current tight supply persist Occupiers continue to seek out cost effective space, but options are limited. The overall vacancy rate is just 3.3%, or 2.2 million sq ft of available space, and over 3 of this is located in the most expensive sub-market, Central. Only 7% of all vacant space in Hong Kong is located in decentralised Hong Kong Island and Kowloon. Government action on land supply The government recently announced details of the 2013 / 2014 land sales programme and highlighted nine commercial/business sites for tender, which will provide a total of 3.6 million sq ft. While this is undoubtedly a welcome development and the stated intention of increasing the supply of commercial land is encouraging, the devil is certainly in the detail. Three sites have been rolled over from a previous program and another four have already been counted in future supply estimates through to 2020. 6 5 4 3 2 1 0 Chart of the Quarter Pipeline supply Development completions (million sq ft) Three of the sites to be tendered in Oct 2013 - Mar 2014 are located in Kowloon East, providing a possible 2.3 million sq ft, although other commercial uses or hotel development may reduce the office provision. This should further consolidate the area as a key office hub. However, it may not be until 2018, at the earliest, before development is completed. A platform for rental growth Given the lack of new supply feeding into the market, we do not anticipate a significant increase in vacancy in the short / medium term. In fact, considering that net absorption is currently just half the long term average, when demand fully recovers going forward we could well see a further tightening in vacancy rates. As such, beyond 2013 we could see a significant and prolonged increase in CBD rents. Occupiers are aware of this and are wary of committing to space in the top tier buildings at rents which are currently attractive, conscious of a possible sharp uplift in rents upon rent review or lease expiry. New Supply Hong Kong Science Park Gov. land supply 2013/14 Avge anticipated supply Avge historic supply
Percentage of stock 2 HONG KONG ISLAND WEAKNESSES IN CORE CBD ARE EXPECTED TO PERSIST THROUGH 2013 Occupiers continue to exercise caution Demand in Central has yet to fully recover despite early signs of more activity than previous quarters. The Bank of America Merrill Lynch deal in Cheung Kong Center at the end of last quarter had an anticipated positive effect in the short-term. However, the volume of space occupiers seeking to drop still outweighs that of new lettings or expansions. Activity from the legal sector has also slowed following an active 2012. Meanwhile, Mainland Chinese firms have been driving demand for premium space, the lack of transparency and absence of a clear business plan in many cases calls into question the sustainability of this demand. Elsewhere, cost conscious occupiers continue to boost activity beyond the CBD. In Causeway Bay, tenants in Sunning Plaza were notified during the quarter of its redevelopment plan and they are to vacate the building by September. This creates an unforeseen demand for over 200,000 sq ft of space in an already tight market. Similarly in Hong Kong East, demand for space is also strong given the upcoming demolition of Somerset House. Vacancy is tight beyond the CBD Vacancy rates remained largely stable across Hong Kong Island during Q1. Available space is still more abundant in Central with almost 670,000 sq ft of available space giving a vacancy rate of 4.9%. Decentralised Hong Kong Island continues to be a tight market for occupiers with vacancy rates in Hong Kong East and North Point just above 1%. This equates to less than 84,000 sq ft of available space. Furthermore, the amount of secondary space coming onto the market this year may be far less than previously expected. For example, over 6 of the 58,000 sq ft vacated by Convoy in One Island East this quarter was quickly taken. In addition, pipeline supply remains limited across Hong Kong Island. Only three grade A office buildings are scheduled for completion until the end of next year with two of these projects already pre-leased en-bloc. Possible rental uplift going forward post 2013 Core CBD and Fringe Core CBD on Hong Kong Island continues to experience some downward pressure on rents as weaknesses in certain sectors, particularly banking, impacts on rents in Central, Admiralty and Sheung Wan. This counterbalances positive rental growth in other Midtown and Decentralised locations on the Island. Weakness in Central rental levels may continue through 2013 as occupier attention is focused elsewhere. However, stronger demand should pick up as we move into 2014 and we could quickly see a turnaround, given the lack of space across the market. Past experience has shown Hong Kong rents to be very volatile and rental movements, in both directions, can be relatively strong and sudden. Hong Kong Island Net Absorption 1,200 800 400 0-400 -800 Thousand sq ft Hong Kong Island Vacancy Rate 8% 6% 4% 2% Hong Kong Island Rental Growth 2 - -2-3 Q-o-q % change Hong Kong Island Supply Pipeline 4% 2% To end 2014 To end 2016 Core Fringe Midtown Decentralised
Percentage of stock KOWLOON LOW VACANCY IS HINDERING OCCUPIER EXPANSION PLANS Kowloon Net Absorption 1,800 1,200 600 0-600 Thousand sq ft Kowloon Vacancy Rate 4 3 2 Kowloon Rental Growth 3 2 - -2-3 Kowloon Supply Pipleine Q-o-q % change 4 3 To end 2014 To end 2016 Core Fringe Midtown Decentralised Low vacancy is impacting on net absorption levels The acute shortage of vacant space in Kowloon continues despite the average vacancy rate increasing slightly in Q1 by 0.5% to 2.1%, which is still well below the long-term average vacancy rate of 9.. The higher figure can largely be attributed to Kowloon East after a 1.1% increase this quarter to 2.9%, its highest rate since Q2 2012 but still 2.4% lower than the same period a year ago. Four developments totaling less than 700,000 sq ft is expected for completion this year. However, they have all been, or are likely to be, sold strata title. Occupier demand in Hong Kong is focused on cost efficiency while at the same time, almost counter intuitively, net absorption in cheaper, decentralised locations is trending downwards. Net absorption in Kowloon was negative in Q1 as a lack of suitable options has hindered expansion plans for companies in the product sourcing, insurance, and consultant engineering sectors. Rental growth decelerating in the better locations Rental levels across Kowloon continued to push upwards during Q1, albeit at a weaker rate than in previous quarters. The average rent in Kowloon increased by only 0.8% this quarter, the smallest quarterly growth rate since Q4 2009 as a lack of large deals, itself due to the shortage of available space, contributed to slow rental growth. Strong rental growth in some areas through 2012 has made office space relatively less attractive and this is now impacting on rental growth. Rents in some of the better buildings in Tsim Sha Tsui, such as The Gateway, are no more than static, even if positive growth is still being recorded in 2 nd Tier buildings. Decentralised locations such as Cheung Sha Wan and Kwai Chung are increasingly becoming the target for mainstream occupiers. As such, rental levels in decentralized areas continued to outperform core locations. The average rent in Tsim Sha Tsui only increased by 0.5% in Q1, compared to a 7.8% and 2.5% growth in Cheung Sha Wan and Kwai Chung respectively. Tsim Sha Tsui rents are likely to remain rather stable this year on the back of rents reaching historic high levels coupled with up to 200,000 sq ft of secondary space potentially available in a major office portfolio in the locality. Buildings in decentralised locations such as Cheung Sha Wan or average graded buildings are expected to witness stronger growth given the high demand for cost effective space. 3 2 3
HONG KONG ISLAND KEY MARKET DATA Core - Central ; Fringe Core - Sheung Wan, Admiralty; Midtown Wan Chai, Causeway Bay; Decentralised - North Point, Hong Kong East Selected leasing transactions in Q1 2013 Property District Size (sf net) Tenant Kerry Centre Hong Kong East 21,600 Pfizer Inc Times Square Shell Tower Causeway Bay 12,000 Google (Hong Kong) Limited One Island East Hong Kong East 14,000 SWIFT Selected office supply Property District Size (sf net) Expected date of completion Exchange Square The Forum Offices [pre-leased] Central 40,000 Q4 2013 31-37 Des Voeux Road Central Central 65,000 Q1 2014 10-12 Queen s Road Central Central 87,000 Q4 2015 Sub-market key stats 4 Area Vacancy rate (% stock) Rent (HK$ psf) Central 4.9 +0.2-0.8 100.4-1.5-4.8 Sheung Wan 4.8 +1.2 +2.2 61.0-4.3-2.4 Admiralty 5.5 +0.5 +1.3 73.5-0.4 +1.5 Wan Chai 4.2 +0.4 +2.4 61.0 +0.6 +6.6 Causeway Bay 5.1-0.4-1.9 54.6 +2.0-2.3 North Point 1.2-0.5-0.8 37.6 +1.7 +14.07 Hong Kong East 1.1-0.2-2.8 46.7 +2.5 +9.4
KOWLOON KEY MARKET DATA Core - Tsim Sha Tsui ; Fringe Core - Tsim Sha Tsui East, Jordan, Mongkok, Hunghom; Midtown Kowloon East; Decentralised San Po Kong, Kowloon Tong, Kwai Chung & Tsuen Wan, Cheung Sha Wan, Sheung Shui, Tung Chung, Shatin Selected leasing transactions in Q1 2013 Property District Size (sf net) Tenant The Gateway, Sun Life Tower Tsim Sha Tsui 26,000 Pernod Ricard HK Ltd Nina Tower Kwai Chung & Tsuen Wan 14,700 CEI Conrad Electronic International (HK) Limited Millennium City (IV) Kowloon East 17,100 DBS Bank (HK) Ltd Selected office supply Property District Size (sf net) Expected date of completion 49 King Yip Street Kowloon East 81,000 Q1 2013 6 Wang Kwong Road Kowloon East 198,000 Q3 2013 181 Hoi Bun Road Kowloon East 237,000 Q4 2013 5 Sub-market key stats Area Vacancy rate (% stock) Rent (HK$ psf) Tsim Sha Tsui 1.5-0.4-2.1 60.1 +0.5 +7.8 Tsim Sha Tsui East 1.9 +1.0-1.0 34.0-0.6 +7.9 Kowloon East 2.9 +1.1-2.4 34.1 +1.5 +12.1 Hunghom 0.9 +0.4 +0.1 32.7 +1.1 +12.5 Mongkok 2.2 +0.2 +1.3 43.8 No change +4.0 Kwai Chung & Tsuen Wan 2.2 +0.1 +1.3 32.8 +2.5 +12.8 Cheung Sha Wan 0.9 0.2 +0. 26.3 +7.8 +15.3 5
CONTACTS For more information about this Hong Kong MarketView, please contact: Edward Farrelly Director t: +852 2820 2886 e: edward.farrelly@cbre.com.hk Roy Ng Senior Analyst t: +852 2820 2842 e: roy.ng@cbre.com.hk Rosanna Tang Associate Director t: +852 2820 2806 e: rosanna.tang@cbre.com.hk For more information about opportunities in the Hong Kong office market, please contact: Rhodri James Executive Director t: +852 2820 2883 e: rhodri.james@cbre.com.hk James McLean Executive Director t: +852 2820 8110 e: james.e.mclean@cbre.com.hk John Davies Executive Director Suites 1201-03 & 14, 12/F, Tower 6 The Gateway, 9 Canton Road Tsim Sha Tsui, Kowloon, Hong Kong t: +852 2989 5127 e: john.davies@cbre.com.hk + FOLLOW US GOOGLE+ FACEBOOK TWITTER Global Research and Consulting This report was prepared by the Team which forms part of Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. 6 Disclaimer 2013 Limited. Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of.