Hong Kong Office Marketview Q2 2013 CBRE Global Research and Consulting

Hong Kong Office MarketView Q2 2013 CBRE Global Research and Consulting

OVERALL HONG KONG CENTRAL HONG KONG ISLAND KOWLOON Rents +0.3% q-o-q Rents -0.2% q-o-q Rents +0.8% q-o-q Rents -0.2% q-o-q

OCCUPIERS COMPETE TO SECURE LIMITED COST EFFECTIVE SPACE

Hot Topics Lack of options driving renewals they currently lease and occupy in Kowloon Commerce Centre, Tower A. Options for Central occupiers seeking . Demand in Central remained to save costs and relocate to other Activity in Kowloon East lukewarm, despite some areas are restricted on the back of In Kowloon East, tenants facing expansion activity from the rising rents in decentralised districts renewals are often met with a market Private Banking sector. Cost and the lack of available space. rent that is somewhat higher than their continues to drive activity on Renewals are more likely during existing rental levels. Some retail sector Hong Kong Island. Causeway Renewal vs Relocation decisions, companies, who previously relocated Bay was the most active district especially for those occupying more from Tsim Sha Tsui, may look to move following the announcement of than 20,000 sq ft. Even for those who back as the rental differential between Sunning Plaza redevelopment. In relocate, expansions are rare. the two districts narrows. Those who Kowloon, demand continued to Businesses are also conscious about find it difficult to bear the increase in be active with some companies capital expenditure outlay, which could rents are seeking cost effective options looking for large, cost effective substantially negate any rental savings in lower quality buildings or other space. However, such space is in provided by relocation. decentralised districts. shortage to fulfill all the Occupiers are purchasing space requirements. Recognizing an opportunity in the The lack of large cost effective space market, some investors and landlords and the desire for cost stability have turned to revitalizing old industrial . Overall Hong Kong vacancy continues to drive some occupiers into buildings into office buildings. There decreased slightly in Q2. purchasing space for self-use. Manulife are currently four revitalized buildings Vacancy fell the most in (International) Limited purchased One expected for completion in 2014 and Causeway Bay as Hysan Place Bay East, West Tower in Kowloon East. 2015. Three of those are located in reached near full occupancy. This is a new development currently Kowloon East, with the other located in Vacancy in Kowloon increased under construction, to be completed by Kwai Chung & Tsuen Wan. They may but remains at a low level. The 2016. They are expected to occupy this not be grade A but they should capture lack of large contiguous space 512,000 sq ft office building for own demand from cost conscious grade A remains a challenge for large use. China Mobile Limited bought five tenants. occupiers. floors, totalling over 120,000 sq ft,

. Rents in Hong Kong remain Chart of the Quarter Rents are at peak outside the CBD stable, rental decline has Net Effective Rent (HK$ psf/month) decelerated in Core areas and 140 rental growth slowed in 120 Max Min Current decentralised districts. Options 100 for cost conscious occupiers are limited and more tenants choose 80 to renew rather than relocate. 60 Second tier buildings or building 40 1 with lower base rents continue to 20 witness the biggest rental growth.

Core

(HKI)

Core

(HKI)

Midtown

(HKI)

(Kln & NT) & (Kln

Fringe Core Fringe Core Fringe

(Kln & NT) & (Kln

Kowloon East Kowloon

Decentralised Decentralised Source: CBRE

LIMITED EXPANSION ACTIVITY AS FOCUS CONTINUE ON COSTS Hong Kong Office| Kong Hong Causeway Bay most active, Central remains quiet Hong Kong Island Net Absorption Activity remains subdued in Central and demand is more prominent for space of less than 10,000 sq ft. Large Thousand sq ft

800 occupiers are still cost conscious with limited expansion 600 Core Fringe Core Midtown Decentralised requirements. The legal sector is focused on consolidation

Thousands 400 or relocation for better value rather than expansion. The 200 flurry of Mainland Chinese firms taking up premium space

0 MarketView appears to be slowing with demand largely for small space -200 of less than 3,000 sq ft. In the banking sector, organic -400 growth in Private Banking has led to some expansion -600 activity, e.g. J.P. Morgan and Pictet & Cie have taken 2008 2009 2010 2011 2012 2013 expansion space of over 60,000 sq ft in Chater House. Source: CBRE 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 Hong Kong Island Vacancy Rate Bay while two tenants took space in 28 Hennessy Road, Wan Chai. The IT sector is also active in the Causeway Bay 10% area with expansions and some new setups. Hence, strong 8% positive net absorption of 130,000 sq ft was recorded for Midtown in Q2. In Hong Kong East, J.P. Morgan took 6% expansion space in One Island East as a trickledown effect 4% to accommodate their Central expansion. 2% Tight vacancy persists outside the core CBD 0% 2008 2009 2010 2011 2012 2013 Vacancy on Hong Kong Island fell slightly by 0.4% in Q2 as Central vacancy remains stable and vacancy elsewhere Core Fringe Core Midtown Decentralised continues to fall. Hysan Place reaching near full occupancy Source: CBRE pushed vacancy down by 1.4% q-o-q in Causeway Bay. Hong Kong East and North Point vacancies also remain very Hong Kong Island Rental Growth low at around 1%. The proportion of vacant space on Hong Kong Island located outside of Central decreased in Q2. 20% Q-o-q % change The drop from 58% in Q1 to 52% in the second quarter further highlights the lack of cost effective options for 10% occupiers. 0% Rental recovery in Central expected next year -10% -20% The average rent on Hong Kong Island remains stable and has been flat year-to-date. The rental declines in core areas -30% are offset by increases in decentralised districts. However, 2008 2009 2010 2011 2012 2013 rents in Core and Fringe Core areas are falling at a Core Fringe Midtown Decentralised decelerating pace. Central rent fell by only 0.2% q-o-q in Source: CBRE Q2 compared with a 1.5% q-o-q fall in Q1. The appetite for cost effective space continued to drive rents in Causeway Hong Kong Island Supply Pipeline Bay and North Point to rise by 7.6% and 8.4% respectively in Q2. Causeway Bay reached its highest historical level. 4% While we still expect to see an improvement in Central rents To end 2014 To end 2016 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 2% 2 significant vacant space may also adopt a more realistic approach to rental expectations. For other landlords, stock of Percentage however, they understand the lack of relocation options and 0% hold a strong position during renewal negotiations. In Core Fringe Core Midtown Decentralised decentralised districts, low vacancy and sustained demand are likely to support rental growth. Source: CBRE

ACTIVITY HINDERED BY THE LACK OF LARGE CONTIGUOUS SPACE Hong Kong Office| Kong Hong Kowloon Net Absorption Very few options for large requirements Kowloon remains an active market, despite overall negative Thousand sq ft net absorption in Q2. The negative net absorption is 1,800 explained by the low volume of transactions on the back of Core Fringe Core Kowloon East Decentralised tight vacancy. There are numerous tenants with space 1,200 Thousands requirements of over 20,000 sq ft. Some have managed to 600 secure space, often in shadow space, e.g. BBVA leased a

whole floor in ICC and will relocate their operations from MarketView 0 Central; Puma, currently in The Gateway, took just over 20,000 sq ft in Festival Walk. However, the lack of large -600 contiguous space in the market means those requirements 2008 2009 2010 2011 2012 2013 may take a long time to achieve or may not be fulfilled at all. Source: CBRE International sourcing companies remain active in seeking Kowloon Vacancy Rate 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 40% not yet have a presence in Hong Kong but seek space. 30% Vacancy increased due to new building 20% The acute shortage of space in Kowloon alleviated 10% somewhat in Q2. Kowloon vacancy increased by 0.9% q-o-q in Q2 to 3.0%, the highest level since Q1 2012. The 0% amount of vacant space increased from 550,000 sq ft net in 2008 2009 2010 2011 2012 2013 Q1 to 800,000 sq ft net in Q2. Much of that is from Core Fringe Core Kowloon East Decentralised Kowloon Commerce Centre, Tower B, coming onto the Source: CBRE 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, Kowloon Rental Growth the only other grade A buildings in Kowloon with more than 20,000 sq ft net of contiguous vacant space are Octa Tower Q-o-q % change 30% and Millennium City 5. 20% 10% Rental growth continue in decentralised districts 0% The average Kowloon rent declined slightly in Q2, despite -10% low vacancy and continued demand for cost effective space. -20% The 0.2% q-o-q decrease was mainly due to rents in The -30% Gateway portfolio moderating. The landlord has become 2008 2009 2010 2011 2012 2013 more flexible on rentals given large upcoming vacancies. Core Fringe Kowloon East Decentralised Outside Tsim Sha Tsui, rents continue to rise. Kwai Chung & Tsuen Wan posted the highest rental growth in Q2, 5.9% Source: CBRE q-o-q, which pushed rents in the district to a new historic maximum. Kowloon Supply Pipeline For the remainder of the year, rents are expected to move in a similar direction to 1H 2013. Core location buildings with 50% To end 2014 To end 2016 large upcoming vacancies are expected to remain under

40% pressure. Decentralised districts are likely to see moderate 30% growth but tight vacancy may hinder the number of transactions. Lower quality buildings at the end of the rental 3 20% spectrum are expected to see rents grow at a higher pace as 3 Percentage of stock of Percentage 10% they may offer better value for cost conscious occupiers. We may see en-bloc or large portions of revitalized buildings 0% swiftly pre-leased before their completions, given the lack of Core Fringe Core Kowloon East Decentralised large cost effective space. Some occupiers are likely to Source: CBRE continue to seek purchase options for cost savings and long- term consolidation.

KEY MARKET DATA

Hong Kong Office| Kong Hong

MarketView

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

Q-o-Q change Y-o-Y change Q-o-Q change Y-o-Y change 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

4 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

KEY MARKET DATA

Hong Kong Office| Kong Hong

MarketView

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

Sub-market key stats

Q-o-Q change Y-o-Y change Q-o-Q change Y-o-Y change 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

5 Kwai Chung & Tsuen Wan 10.6 +8.4 +5.6 34.8 +5.9 +18.8 5 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

CONTACTS Hong Kong Office| Kong Hong For more information about this Hong Kong MarketView, please contact:

Hong Kong Research Edward Farrelly Roy Ng Rosanna Tang Director Senior Analyst Associate Director Hong Kong Research Hong Kong Research Hong Kong Research CBRE CBRE CBRE 4/F Three Exchange Square 4/F Three Exchange Square

4/F Three Exchange Square MarketView 8 Connaught Place 8 Connaught Place 8 Connaught Place Central, Hong Kong Central, Hong Kong Central, Hong Kong t: +852 2820 2886 t: +852 2820 2842 t: +852 2820 2806 e: [email protected] e: [email protected] e: [email protected]

For more information about opportunities in the Hong Kong office market, please contact:

Hong Kong Office Services Rhodri James James McLean John Davies Executive Director Executive Director Executive Director Hong Kong Office Services Hong Kong Office Services Hong Kong Office Services CBRE CBRE CBRE 4/F Three Exchange Square 4/F Three Exchange Square Suites 1201-03 & 14, 12/F, Tower 6 8 Connaught Place 8 Connaught Place The Gateway, 9 Canton Road Central, Hong Kong Central, Hong Kong Tsim Sha Tsui, Kowloon, Hong Kong t: +852 2820 2883 t: +852 2820 8110 t: +852 2989 5127 e: [email protected] e: [email protected] e: [email protected]

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Global Research and Consulting This report was prepared by the CBRE Hong Kong Research Team which forms part of CBRE 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.

Disclaimer 6 © 2013 CBRE Limited. CBRE 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 CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.