Core Fringe Core Midtown Decentralised Core Fringe Core Kowloon East Decentralised Hong Kong Office MarketView Q2 2013 Global Research and Consulting OVERALL HONG KONG Rents +0.3% q-o-q CENTRAL Rents -0.2% q-o-q HONG KONG ISLAND Rents +0.8% q-o-q KOWLOON Rents -0.2% q-o-q OCCUPIERS COMPETE TO SECURE LIMITED COST EFFECTIVE SPACE Hot Topics Demand in Central remained lukewarm, despite some expansion activity from the Private Banking sector. Cost continues to drive activity on Hong Kong Island. Causeway Bay was the most active district following the announcement of Sunning Plaza redevelopment. In Kowloon, demand continued to be active with some companies looking for large, cost effective space. However, such space is in shortage to fulfill all the requirements. Overall Hong Kong vacancy decreased slightly in Q2. Vacancy fell the most in Causeway Bay as Hysan Place reached near full occupancy. Vacancy in Kowloon increased but remains at a low level. The lack of large contiguous space remains a challenge for large occupiers. Lack of options driving renewals Options for Central occupiers seeking to save costs and relocate to other areas are restricted on the back of rising rents in decentralised districts and the lack of available space. Renewals are more likely during Renewal vs Relocation decisions, especially for those occupying more than 20,000 sq ft. Even for those who relocate, expansions are rare. Businesses are also conscious about capital expenditure outlay, which could substantially negate any rental savings provided by relocation. Occupiers are purchasing space The lack of large cost effective space and the desire for cost stability continues to drive some occupiers into purchasing space for self-use. Manulife (International) Limited purchased One Bay East, West Tower in Kowloon East. This is a new development currently under construction, to be completed by 2016. They are expected to occupy this 512,000 sq ft office building for own use. China Mobile Limited bought five floors, totalling over 120,000 sq ft, they currently lease and occupy in Kowloon Commerce Centre, Tower A. Activity in Kowloon East In Kowloon East, tenants facing renewals are often met with a market rent that is somewhat higher than their existing rental levels. Some retail sector companies, who previously relocated from Tsim Sha Tsui, may look to move back as the rental differential between the two districts narrows. Those who find it difficult to bear the increase in rents are seeking cost effective options in lower quality buildings or other decentralised districts. Recognizing an opportunity in the market, some investors and landlords have turned to revitalizing old industrial buildings into office buildings. There are currently four revitalized buildings expected for completion in 2014 and 2015. Three of those are located in Kowloon East, with the other located in Kwai Chung & Tsuen Wan. They may not be grade A but they should capture demand from cost conscious grade A tenants. 1 Rents in Hong Kong remain stable, rental decline has decelerated in Core areas and rental growth slowed in decentralised districts. Options for cost conscious occupiers are limited and more tenants choose to renew rather than relocate. Second tier buildings or building with lower base rents continue to witness the biggest rental growth. Chart of the Quarter Rents are at peak outside the CBD 140 Net Effective Rent (HK$ psf/month) 120 Max Min Current 100 80 60 40 20 0
Percentage of stock Thousands 2 HONG KONG ISLAND LIMITED EXPANSION ACTIVITY AS FOCUS CONTINUE ON COSTS Causeway Bay most active, Central remains quiet Activity remains subdued in Central and demand is more prominent for space of less than 10,000 sq ft. Large occupiers are still cost conscious with limited expansion requirements. The legal sector is focused on consolidation or relocation for better value rather than expansion. The flurry of Mainland Chinese firms taking up premium space appears to be slowing with demand largely for small space of less than 3,000 sq ft. In the banking sector, organic growth in Private Banking has led to some expansion activity, e.g. J.P. Morgan and Pictet & Cie have taken expansion space of over 60,000 sq ft in Chater House. Outside Central, the plan to redevelop Sunning Plaza continues to drive activity. Most of the Sunning Plaza tenants have relocated within the landlord s portfolio in Causeway Bay while two tenants took space in 28 Hennessy Road, Wan Chai. The IT sector is also active in the Causeway Bay area with expansions and some new setups. Hence, strong positive net absorption of 130,000 sq ft was recorded for Midtown in Q2. In Hong Kong East, J.P. Morgan took expansion space in One Island East as a trickledown effect to accommodate their Central expansion. Tight vacancy persists outside the core CBD Vacancy on Hong Kong Island fell slightly by 0.4% in Q2 as Central vacancy remains stable and vacancy elsewhere continues to fall. Hysan Place reaching near full occupancy pushed vacancy down by 1.4% q-o-q in Causeway Bay. Hong Kong East and North Point vacancies also remain very low at around 1%. The proportion of vacant space on Hong Kong Island located outside of Central decreased in Q2. The drop from 58% in Q1 to 52% in the second quarter further highlights the lack of cost effective options for occupiers. Rental recovery in Central expected next year The average rent on Hong Kong Island remains stable and has been flat year-to-date. The rental declines in core areas are offset by increases in decentralised districts. However, rents in Core and Fringe Core areas are falling at a decelerating pace. Central rent fell by only 0.2% q-o-q in Q2 compared with a 1.5% q-o-q fall in Q1. The appetite for cost effective space continued to drive rents in Causeway Bay and North Point to rise by 7.6% and 8.4% respectively in Q2. Causeway Bay reached its highest historical level. While we still expect to see an improvement in Central rents later this year, some factors may soften or delay this upturn. Weaknesses remain with some banking tenants still consolidating and considering lay-offs. Landlords with significant vacant space may also adopt a more realistic approach to rental expectations. For other landlords, however, they understand the lack of relocation options and hold a strong position during renewal negotiations. In decentralised districts, low vacancy and sustained demand are likely to support rental growth. Hong Kong Island Net Absorption 800 600 400 200 0-200 -400-600 Thousand sq ft Core Fringe Core Midtown Decentralised Hong Kong Island Vacancy Rate 8% 6% 4% 2% Hong Kong Island Rental Growth 2 - -2-3 Q-o-q % change Core Fringe Core Midtown Decentralised Hong Kong Island Supply Pipeline 4% 2% To end 2014 To end 2016 Core Fringe Midtown Decentralised Core Fringe Core Midtown Decentralised
Percentage of stock Thousands 3 KOWLOON ACTIVITY HINDERED BY THE LACK OF LARGE CONTIGUOUS SPACE 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 Pipeline Core Fringe Core Kowloon East Decentralised Q-o-q % change 5 4 3 2 Core Fringe Core Kowloon East Decentralised To end 2014 To end 2016 Core Fringe Kowloon East Decentralised Core Fringe Core Kowloon East Decentralised Very few options for large requirements Kowloon remains an active market, despite overall negative net absorption in Q2. The negative net absorption is explained by the low volume of transactions on the back of tight vacancy. There are numerous tenants with space requirements of over 20,000 sq ft. Some have managed to secure space, often in shadow space, e.g. BBVA leased a whole floor in ICC and will relocate their operations from Central; Puma, currently in The Gateway, took just over 20,000 sq ft in Festival Walk. However, the lack of large contiguous space in the market means those requirements may take a long time to achieve or may not be fulfilled at all. International sourcing companies remain active in seeking space in Kowloon. Some global sourcing firms, previously using other sourcing companies, have already set up their own office in Hong Kong. There are other such firms who do not yet have a presence in Hong Kong but seek space. Vacancy increased due to new building The acute shortage of space in Kowloon alleviated somewhat in Q2. Kowloon vacancy increased by 0.9% q-o-q in Q2 to 3., the highest level since Q1 2012. The amount of vacant space increased from 550,000 sq ft net in Q1 to 800,000 sq ft net in Q2. Much of that is from Kowloon Commerce Centre, Tower B, coming onto the leasing market. The challenge for occupiers, however, continues to be the lack of large contiguous space in the market. Apart from Kowloon Commerce Centre, Tower B, the only other grade A buildings in Kowloon with more than 20,000 sq ft net of contiguous vacant space are Octa Tower and Millennium City 5. Rental growth continue in decentralised districts The average Kowloon rent declined slightly in Q2, despite low vacancy and continued demand for cost effective space. The 0.2% q-o-q decrease was mainly due to rents in The Gateway portfolio moderating. The landlord has become more flexible on rentals given large upcoming vacancies. Outside Tsim Sha Tsui, rents continue to rise. Kwai Chung & Tsuen Wan posted the highest rental growth in Q2, 5.9% q-o-q, which pushed rents in the district to a new historic maximum. For the remainder of the year, rents are expected to move in a similar direction to 1H 2013. Core location buildings with large upcoming vacancies are expected to remain under pressure. Decentralised districts are likely to see moderate growth but tight vacancy may hinder the number of transactions. Lower quality buildings at the end of the rental spectrum are expected to see rents grow at a higher pace as they may offer better value for cost conscious occupiers. We may see en-bloc or large portions of revitalized buildings swiftly pre-leased before their completions, given the lack of large cost effective space. Some occupiers are likely to continue to seek purchase options for cost savings and longterm consolidation. 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 Q2 2013 Property District Size (sf net) Tenant Chater House Central 36,800 Pictet & Cie Chater House Central 27,600 J.P.Morgan Hutchison House Central 10,000 Cliftons 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 5.1 +0.2-0.2 100.3-0.2-4.3 Admiralty 4.9-0.6 +0.2 72.7-1.1-1.0 Sheung Wan 4.4-0.4 +2.5 61.6 +0.9-4.8 Wan Chai 3.0-1.2 +1.4 60.9-0.2 +4.7 Causeway Bay 3.9-1.2-1.3 59.7 +9.2 +5.8 Hong Kong East 0.8-0.3-2.7 47.0 +0.6 +6.5 North Point 1.2 -- -0.8 40.7 +8.4 +22.9
KOWLOON KEY MARKET DATA Core - Tsim Sha Tsui ; Fringe Core - Tsim Sha Tsui East, Jordan, Mongkok, Hunghom; Kowloon East Kowloon East; Decentralised San Po Kong, Kowloon Tong, Kwai Chung & Tsuen Wan, Cheung Sha Wan, Sheung Shui, Tung Chung, Shatin Selected leasing transactions in Q2 2013 Property District Size (sf net) Tenant Grand Century Place, Tower 1 Mongkok 11,700 Pizza Hut, Inc. The Gateway, Tower 2 Tsim Sha Tsui 11,500 Chinatrust Commercial Bank AIA Tower, Landmark East Kowloon East 8,000 Asia Capital Reinsurance Group Pte. Ltd. Selected office supply Property District Size (sf net) Expected date of completion 6 Wang Kwong Road Kowloon East 198,000 Q3 2013 181 Hoi Bun Road Kowloon East 237,000 Q3 2013 Rykaden Capital Tower Kowloon East 173,000 Q4 2013 5 Sub-market key stats Area Vacancy rate (% stock) Rent (HK$ psf) Tsim Sha Tsui 2.1 +0.6 +0.3 59.1-1.6 +0.2 Mongkok 1.7-0.5 +0.6 43.7 -- +2.2 Tsim Sha Tsui East 1.8-0.1-2.0 37.0-0.1 +5.8 Kwai Chung & Tsuen Wan 10.6 +8.4 +5.6 34.8 +5.9 +18.8 Kowloon East 3.3 +0.3-1.1 34.5 +1.3 +10.9 Hunghom 1.9 +1.0 +1.0 33.5 +2.5 +13.7 Cheung Sha Wan 1.6 +0.8 +1.1 26.9 +2.6 +18.2 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.