4Q 2012 market overview research & forecast report hong kong OFFICE market colliers international HONG KONG Strong Investment Demand Government policy restrictions on the residential sector encouraged investors to park their money in the commercial sector. Investment demand for office premises was strong in 4Q 2012. The total value of office sales transactions with a lump sum price of HK$30 million or above surged 111% QoQ to HK$14.9 billion. Local developers took the opportunity to dispose of their commercial investment assets in non-core business areas. Notable sales transactions were focused on some en bloc buildings in decentralised office districts. Average Grade A office yield compressed 10 basis points from 3.2% in July to 3.1% in October 2012, reflecting strong investment demand for Grade A office premises. market indicators ForEcast overall performance New supply Tenant Demand Incentives rents capital values yields Leasing activity during 4Q 2012 was largely underpinned by expansion demand in the legal sector and newcomers in the finance sector. The overall net take-up increased from 111,000 sq ft in 3Q 2012 to 372,000 sq ft in 4Q 2012. In Central, tenants in the legal and finance sectors were comparatively active in office leasing enquiries and typically had office requirements from 3,000 to 5,000 sq ft, while some individual tenants had requirements up to 10,000 sq ft. Kowloon East was responsible for the bulk of new take-up during the quarter, as a new round of expansions in the shipping / logistics sectors increased net take-up in the district. Regardless of increasing take-up, overall Grade A office rents saw a downward correction of 2.3% in 4Q 2012. This was largely due to softening demand for premium Grade A office space in Central, as tenants could not justify the wide gap between premium rents and their budgets. After posting a 0.8% QoQ increase in 3Q 2012, rents in Central dropped by 5.7% QoQ in 4Q 2012. Benefitting from relocation demand, Island East displayed the strongest rent growth of 4.8% QoQ in 4Q 2012, followed by a 4.3% QoQ increase in Kowloon East, reaffirming the trend of decentralisation. Recent signs of increasing leasing activities show the overall office market is set to regain growth momentum. The improved business conditions will encourage business expansion plans, and an increasing number of companies in hiring will progressively support office leasing demand. The overall Grade A office rent is predicted to rebound by 4% in 2013. Buying interest in the commercial sector will remain strong if the tightening policy measures on the residential market are still in place. With the limited buying options in the sub-market of Central, investors and end-users will look for investment opportunities in decentralised locations such as Island East and Kowloon East, which in turn will push office prices upwards. Capital values in decentralised areas will outperform core locations over the next 12 months. www.colliers.com/hongkong
Improving Market Conditions The improved business conditions will encourage business expansion plans, thereby supporting the office leasing demand. The overall Grade A office rent is set to rebound in 2013. PMI signals improvement in business conditions The HSBC Hong Kong Purchasing Managers Index increased from 50.5 in November 2012 to 52.2 in December 2012, signalling a further improvement in Hong Kong s business conditions. More optimistic hiring expectations According to a quarterly survey conducted by Hudson, employers in Hong Kong became more optimistic, with 40% of executives interviewed in the poll planning to increase their headcounts in 4Q 2012, versus 38% in 3Q 2012. More than half of the employers (55%) intended to keep headcount steady. Meanwhile, employers intending to decrease headcount dropped to 5%, which is the lowest intention across all countries surveyed in Asia Pacific. Slower contraction of job vacancies in FIRE sector The latest figures from the Census and Statistics Department indicated slower contraction in the Finance, Insurance and Real Estate (FIRE) sector s job vacancies, from negative 9.3% YoY in 2Q 2012 to negative 4.2% YoY in 3Q 2012. Correspondingly, the overall Grade A office rent is set to pick up in 2013. GRADE A OFFICE RENT vs JOB VACANCY IN FIRE SECTOR 140% 120% Last Rally 100% 80% % change year-on-year 60% 40% 20% 0% -20% Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16-40% -60% -80% -100% FIRE Job Vacancy Grade A Office Rent Note: FIRE = Finance, Insurance and Real Estate Source: Census & Statistics Department, HKSAR Government; Colliers p. 2 Colliers International
Tenant Demand GRADE A OFFICE NET TAKE-UP 1,400,000 1,200,000 1,000,000 800,000 Net Floor Area (sq ft) 600,000 400,000 200,000 0-200,000-400,000 1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012-600,000-800,000 Increased net take-up Leasing activity during 4Q 2012 was largely underpinned by expansion demand in the legal sector and newcomers in the finance sector. The overall net take-up increased from 111,000 sq ft in 3Q 2012 to 372,000 sq ft in 4Q 2012, of which China Construction Bank took 257,597 sq ft of space at 18 Kowloon East for owner-occupation. Sub-market performance Increasing enquiries In Central, an increase in office leasing enquiries was observed in 4Q 2012. Tenants in the legal and finance sectors were comparatively active in office leasing enquiries and typically had office requirements from 3,000 to 5,000 sq ft, while some individual tenants had requirements up to 10,000 sq ft. This helped to push net take-up levels in Central up from negative 69,760 sq ft in 3Q 2012 to 29,535 sq ft in 4Q 2012. In Wanchai and Causeway Bay, some cost-sensitive tenants were forced to relocate after receiving their landlord s expensive rental proposals, and looked for office accommodations with lower cost options in other business districts such as Island East or Kowloon. As a result, net take-up in Wanchai and Causeway Bay edged down from 16,056 sq ft in 3Q 2012 to negative 42,333 sq ft in 4Q 2012. In Island East, the impending redevelopment of Somerset House in Quarry Bay continued to lend support to leasing demand in non-core areas. Net take-up in Island East edged down from 25,039 sq ft to 9,643 sq ft in 4Q 2012. In October 2012, Maxim Group moved out of Somerset House and secured alternate accommodation with the lease of six and a half floors (65,000 sq ft) at 1063 King s Road. Kowloon East was responsible for the bulk of take-up Kowloon East was responsible for the bulk of new take-up during the quarter, as China Construction Bank took 257,597 sq ft of space at 18 Kowloon East for owner occupation together with a new round of expansions in the shipping / logistics sectors, net take-up in Kowloon East increased by 176% QoQ to 333,727 sq ft in 4Q 2012. For example, Hapag-Lloyd (China), a global shipping company, committed to lease 15,979 sq ft of space (13/F) in Octa Tower, Kowloon Bay, in October 2012. Meanwhile, APL Logistics, a wholly-owned subsidiary of Singapore-based Neptune Orient Lines, committed to lease 33,800 sq ft of space in Skyline Tower, Kowloon Bay, in December. Sources of demand Prominent leasing transactions in Central were highlighted by the lease of seven floors (150,000 sq ft) in Cheung Kong Centre by Bank of America Merrill Lynch. The group will relocate from Citibank Plaza, with a lease starting in September 2013. Meanwhile, State Streets renewed their lease at Two IFC, occupying 2 floors in the high zone (44,000 sq ft). Colliers International p. 3
Supply Conditions new completions in 4Q 2012 In November 2012, the completion of One Pacific Centre in Kwun Tong, developed by Hong Kong Pacific Investment, brought about 157,600 sq ft (gross) of office space to the market. China Construction Bank Tower (CCB Tower) completed in December 2012, providing a floor area of approximately 170,000 sq ft (lettable) to the market. The bank will occupy about 96,800 sq ft for end use. Supply on Hong Kong Island remains tight in 2013 There will be no significant easing on the current tight Grade A office supply situation on Hong Kong Island, with only one new office development due for completion in 2013. The redevelopment of The Forum, with a floor area of 40,700 sq ft (net) is expected to be completed by late 2013. However, this development will not be available for lease as Standard Chartered Bank have pre-committed to the space for their private banking operations. Kowloon East key source of supply in 2013 The sub-market of Kowloon East will be the key source of supply, providing a total of 1.3 million sq ft net of new Grade A office space, which accounts for 86% of new supply in 2013. GRADE A OFFICE SUPPLY TREND 8.00 7.00 6.00 Floor Area (million sq ft) Long-term Average Annual Supply 2.2 million sq ft 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 5.00 4.00 3.00 2.00 1.00 0.00 Source: Rating and Valuation Department (1985-2011); Colliers (2012-2015) p. 4 Colliers International
Grade A Office Supply 2013-2016 & Beyond building District nfa (sq ft) developer status 2013 New Supply Kowloon Commerce Centre - Tower B Kwai Chung 414,800 Sun Hung Kai Properties Under construction 181 Hoi Bun Road Kwun Tong 262,650 Sun Hung Kai Properties / Under construction Wong's International Rykadan Capital Tower Kwun Tong 189,765 Rykadan Capital Under construction 10 Shing Yip Street Kwun Tong 209,368 Billion Development Under construction 6 Wang Kwong Road Kowloon Bay 224,900 Billion Development Under construction 8 Connaught Place Central 40,700 Hongkong Land Under construction 2013 Total 1,342,183 2014 New Supply 10 Cheung Yue Street Cheung Sha Wan 176,581 Billion Development Under construction 52-56 Tsun Yip Street Kwun Tong 305,989 Billion Development Under construction 15-17 Chong Yip Street Kwun Tong 226,480 Billion Development Under construction NKIL 6314 Kowloon Bay 681,890 Goldin Under Planning 2014 Total 1,390,940 2015 New Supply KIL 11111 Hung Hom 471,997 Wheelock Under construction 180 Wai Yip Street (KTIL 174) Kwun Tong 407,324 Sun Hung Kai Properties / Wong's International Under planning (Existing Wong's Industrial Centre) 2015 Total 879,321 2016 & Beyond New Supply 70 Queen's Road Central Central 156,641 Wheelock Under planning (Existing Crawford House) 38-52 Queen's Road Central Central 167,292 New World Development Under planning (Existing Manning House and Loke Yew Building) 10 Harcourt Road Central 419,468 Hutchison Under planning (Existing Hutchison House) 10 Chater Road Central 514,342 Hongkong Land Under planning (Existing Prince's Building) 14 Wang Tai Road Kowloon Bay 193,749 First Group Under planning (Existing Niche Centre) 2 Ng Fong Street San Po Kong 267,082 Billion Development Under planning (Existing Unimix Industrial Centre) NKIL 6269 Kwun Tong 741,297 Wheelock Under planning 98 How Ming Street (KTIL 240) Kwun Tong 972,243 Transport International Holdings / Sun Hung Kai Properties Under planning (Existing Bus Depot) 123 Hoi Bun Road Kwun Tong 506,782 Wheelock Under planning (Existing Wharf T & T Square) 979 King's Road, Taikoo Place Taikoo Place 760,750 Swire Properties Under planning (Existing Somerset House) 979 King's Road, Taikoo Place Taikoo Place 951,992 Swire Properties Under planning (Existing Warwick House and Cornwall House) STTL 463 Shek Mun 344,000 Billion Development Under planning STTL 412 Shek Mun 299,177 Billion Development Under planning 2016 & Beyond Total 6,294,815 Note: Demolition: Demolition work is actively undergoing Under construction: Construction activity, including either foundation or superstructure, are undergoing on site Under planning (Existing Building): Building plan for a site, currently occupied by a tenanted building, is approved by the Government Under planning (Vacant Building): Building plan for a site, currently occupied by an empty building, is approved by the Government Under planning (Bare Site): Building plan for a bare site is approved by the Government Completed: Construction is completed and an occupation permit is issued by the Government Colliers International p. 5
Vacancy grade a office vacancy rates (by sub-markets) District Total Stock (million sq ft) 4Q 11 1Q 12 2Q 2012 3Q 2012 4Q 2012 Central / Admiralty 21.6 3.8% 5.7% 5.1% 5.5% 5.3% Wan Chai / Causeway Bay 11.4 2.4% 1.6% 3.1% 3.8% 4.2% Island East 10.9 3.9% 4.2% 2.9% 2.6% 1.7% Sheung Wan 1.6 4.0% 3.6% 1.5% 1.7% 1.4% Tsim Sha Tsui 6.6 1.9% 2.9% 1.7% 0.9% 1.6% Kowloon East 9.0 12.5% 10.3% 10.9% 9.6% 7.6% Overall 60.9 4.6% 5.0% 4.7% 4.7% 4.3% Note: Floor area on net basis Signs of falling vacancy The overall vacancy rate declined from 4.7% in 3Q 2012 to 4.3% in 4Q 2012. This was largely underpinned by new set-ups or expansions of legal and finance companies. Vacancy levels in Central, Island East, Sheung Wan and Kowloon East continued to trend downwards, while the relocation of cost-sensitive tenants from Tsim Sha Tsui and Wan Chai / Causeway Bay to other districts led to rising vacancy in these two areas in 4Q 2012. Vacancy forecast Due to the limited supply of Grade A office buildings available for lease in 2013, especially on Hong Kong Island, and the anticipated completion of several office developments across Hong Kong in 2013, the average vacancy level of the whole market will hover at around 4-5% in 2013. GRADE A OFFICE VACANCY RATE TREND 9.0% 8.0% 7.0% 6.0% Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Vacancy Rate Jun-12 Sep-12 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% p. 6 Colliers International
Rent Trend grade a office rentals (by sub-markets) District 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 4Q 2012 (% QoQ) Central / Admiralty $111.8 $109.9 $100.1 $98.1 $98.8 $93.2-5.7% Wan Chai / Causeway Bay $59.3 $59.7 $58.0 $58.8 $59.5 $58.7-1.3% Island East $40.6 $41.1 $39.5 $40.0 $40.5 $42.5 4.8% Sheung Wan $54.7 $54.8 $54.7 $54.3 $52.8 $52.8 0.0% Tsim Sha Tsui $44.8 $44.9 $45.6 $46.5 $49.0 $49.5 1.0% Kowloon East $29.8 $31.3 $31.4 $32.2 $33.0 $34.5 4.3% Overall $67.9 $67.6 $63.9 $63.4 $64.4 $62.9-2.3% Mild downward correction in rents Regardless of increasing take-up and falling vacancy, overall Grade A office rents saw a downward correction of 2.3% in 4Q 2012. This was largely due to softening demand for premium Grade A office space in Central. Central saw falling rents After posting a 0.8% QoQ increase in 3Q 2012, rents in Central dropped by 5.7% QoQ in 4Q 2012. Premium office buildings in Central experienced increasing downward pressure on rents, as some landlords felt the pressure of increasing vacancy rates. The trend of relocation to buildings with lower rents within Central also continued during the quarter. Accelerated rent growth in Island East and Kowloon East Benefitting from relocation demand, Island East displayed the strongest rent growth of 4.8% QoQ in 4Q 2012, followed by a 4.3% QoQ increase in Kowloon East, reaffirming the trend of decentralisation. Falling vacancy prompted landlords to adopt a stronger stance in rent negotiations, thereby lifting overall rent growth in these districts. GRADE A OFFICE RENTAL TREND $80 69.4 67.9 62.9 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Effective Rents (HK$ / sq ft / Month (Net Floor Area)) $70 $60 $50 $40 $30 $20 $10 $0 Colliers International p. 7
Investment Market Total Turnover (HK$ billion) HONG KONG OFFICE INVESTMENT SALES TRANSACTIONS 16 14 12 10 8 6 4 2 0 Historical Average: HK$6.4 billion 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 Note: Investment sales transactions with lump sums of HK$30 million or above Source: EPRC transaction volume increased more than double Government policy restrictions on the residential sector encouraged investors to park their money in the commercial sector. Investment demand for office premises was strong in 4Q 2012. The total value of office sales transactions with a total consideration of HK$30 million or above increased substantially by 111% QoQ, totalling HK$14.9 billion. Investment rationale Since the implementation of tightening measures on the residential market in late October 2012, individual buyers were more aggressive in making their bids on commercial properties. Meanwhile, real estate funds, local private equities and overseas investors became increasingly active. Institutional investors previously bounded by limited LTVs were now more liberal in looking at other financing options such as mezzanine loans. Similar to 2012, further yield compression is anticipated in 2013. More significant compression will happen in decentralised markets such as Island East and Kowloon East. Island East and Kowloon East continue to draw attention Local developers took the opportunity to dispose of their commercial investment assets in noncore business areas so as to spur their profits amid a slow residential sales market. During 4Q 2012, notable sales transactions were focused on some en bloc office buildings in decentralised office districts. In Island East, AIA snapped up the whole block of Stanhope House in Quarry Bay for HK$2.4 billion (HK$8,000 per sq ft), with the intention of keeping the property for both owner-occupancy and long-term investment. Elsewhere, in North Point, ARA Asset Management sold a commercial building at 169 Electric Road to a local investor for HK$3.2 billion (HK$8,277 per sq ft). In Kowloon East, the strata-titled sale of 19 office floors at Rykadan Capital Tower located at 135-137 Hoi Bun Road fetched an average unit price of HK$8,500 per sq ft. Individual sea-view floors at Hoi Bun Road, Kwun Tong surpassed HK$10,000 per sq ft. The prediction is that quality offices in Kwun Tong will reach HK$13,000 per sq ft two years down the road. Another notable sales transaction in Kowloon East was the sale of the mid-zone office floors (16/F to 22/F) in Exchange Tower by Sino Group to a local bank for a total consideration of HK$1.567 billion (HK$8,095 per sq ft). Yields (% per annum) HONG KONG OFFICE INVESTMENT YIELDS 6% 5% 4% 3% 2% 1% 0% Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Grade A Grade B Source: Rating and Valuation Department, HKSAR Government Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 It is our observation that Kowloon East will continue to draw the attention of prospective buyers given the growth potential there. The government intends to transform Kowloon East into a major decentralised office hub with future developments scheduled to be completed in the coming years, like the full completion of the MTR Shatin - Central Link in 2020 and the Kai Tak Cruise Terminal with its first berth will commission in mid-2013. Commercial site sold through government tenders Some developers and investors diverted their attention to commercial properties and acquired commercial land sites for development. In November 2012, a local investor Sanefire Company acquired a commercial site at the junction of Sheung Yuet Road, Wang Tai Road and Wang Yuen Street in Kowloon Bay for HK$1.82 billion or an accommodation value of HK$5,458 per sq ft, which was in line with market consensus. Office Yield Grade A office yield compressed further, reflecting strong investment demand for Grade A office premises. According to the Rating and Valuation Department, the average yield of Hong Kong Grade A offices compressed 10 basis points, from 3.2% in July to 3.1% in October 2012. p. 8 Colliers International
Market Outlook The Hong Kong Grade A office market, especially in the Central sub-market, has seen a softening trend since mid-2011. However, recent signs of increasing leasing activities show the overall office market is set to regain growth momentum. The improved business conditions will encourage business expansion plans, and an increasing number of companies in hiring will progressively support office leasing demand. The overall Grade A office rent is predicted to rebound by 4% in 2013. Rental performance in Central and Kowloon East will outperform the overall market slightly, as a stablise economic condition will be the driver of the Grade A office market. Looking at the investment market, buying interest in the commercial sector will remain strong if the tightening policy measures on the residential market are still in place. With the limited buying options in the sub-market of Central, investors and end-users will look for investment opportunities in decentralised locations such as Island East and Kowloon East, which in turn will push office prices upwards. Capital values in decentralised areas will outperform core locations over the next 12 months. GRADE A OFFICE RENTAL TREND $80 62.9 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Effective Rents (HK$ / sq ft / Month (Net Floor Area)) 69.4 67.9 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 $70 $60 $50 $40 $30 $20 $10 $0 Colliers International p. 9
hong kong 4q 2012 OFFICE 522 offices in 62 countries on 6 continents United States: 147 Canada: 37 Latin America: 19 Asia Pacific: 201 EMEA: 118 $1.8 billion in annual revenue in 2011 1,250 million square feet under management Over 12,300 professionals Colliers International (Hong Kong) Limited Suite 5701 Central Plaza 18 Harbour Road Wanchai Hong Kong tel +852 2828 9888 FAX +852 2828 9899 Company Licence No: C-006052 Richard Kirke Managing Director Hong Kong tel +852 2822 0699 FAX +852 2107 6047 Email richard.kirke@colliers.com Individual Licence: E-279867 Simon Lo Executive Director Research & Advisory Asia tel +852 2822 0511 FAX +852 2868 5275 Email simon.lo@colliers.com Copyright 2013 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. You are receiving this collateral because you either subscribed for it or expressed your interest to receive it at some point to Colliers International. If you do not wish to receive future communications from us, please contact Colliers International by email at unsubscribe.hongkong@colliers.com with your name and item to unsubscribe Accelerating success. www.colliers.com