Central is a prime location for commercial space. It has always been the focal point for multinational financial groups and local traditional enterprises. In recent years, however, these large enterprises have gradually narrowed the office space in Central, with back office and operation department relocating to some non-core districts which have a lower rentals. We believe that with Chinese enterprises’ demand for Grade A office in Central continues to grow, rentals in Central will remain high, forcing more enterprises to move out of Central. Under the spillover effect, rental in Grade A office space in non-core districts in Hong Kong is expected to have significant upside potential.
In recent years, Chinese enterprises’ demand for Grade A office in Central continues to soar, supporting rentals for the whole district continuously. In the first 11 months of last year, rentals in Grade A offices surged 9.2% YoY to HK$111.9 sq/ft, almost reaching HK$116 sq/ft recorded before the financial crisis in 2008, according to Jones Lang LaSalle, an international real estate consultancy. The average rentals in core commercial district is 3.3 times higher than that in the non-core commercial districts, with the rental gap widened to a five-year high, prompting multinational financial groups and local traditional enterprises to relocate their back office and operation department to non-core commercial districts such as Wan Chai, Causeway Bay, Tsim Sha Tsui, North Point, and Quarry Bay to reduce rental costs. The decentralization movement directly stimulate the demand for Grade A office space in non-core commercial districts.
In fact, data from the Hong Kong Rating and Valuation Department shows that the rental growth of Grade A offices in Central underperformed those in non-core commercial districts, reflecting the tendency that tenants are moving to new areas. We expect with the Chinese enterprises continuing to move into Grade A office spaces in Central, rentals in Central is expected to remain high. With tenants continuing to relocate to non-core commercial districts, we expect the huge demand will boost the rentals of Grade A offices within those areas. Yet, the vacancy rate for office space in East Kowloon remained high at 11% by the end of last year, according to Colliers International, an international real estate consultancy. With over 4mn sq/ft of new supply within the next 4 years, we expect rentals of East Kowloon will underperform those in developed commercial districts.