HK to face Grade-A office shortage

8m-sq-feet new office supply will be far short of 17m-sq-feet demand by 2020

Hong Kong is facing a major shortfall of Grade-A office space in the medium term, and the problem is being exacerbated by more offices moving out of Central district to other areas in the city, seen as a decentralization leading to downward adjustments in the central business district (CBD) rents, a research report by CBRE and Daiwa Capital Markets suggests.

The city's current pipeline supply of 8 million square feet in new office spaces in 2020 is far short of the real anticipated demand of 17 million square feet in eight years time - based on an estimated projected GDP growth, the report suggested. It said this would hinder the city's role as a major destination in the region for global corporate occupiers.

Eight years from today, Hong Kong will face "a significant shortage of Grade-A Office space", but the positive aspect for the city is that the issues are not on the demand side, which is expected to remain strong at that time, but rather due to supply constraints, said Craig Shute, a senior managing director for CBRE based in the city.

The anticipated real new office space demand by 2020 that is calculated by Daiwa Capital Markets has an extremely close relationship between business services GDP and demand for office space in Hong Kong, the bank said.

Based on a 4 percent forecasted GDP growth through to 2020 for the business services sector, Hong Kong will require nearly 17 million square feet of new Grade-A office space, the bank added.

"While we are currently seeing weaker rental levels and a rise in vacancy in the core central business district, it is important to look beyond short-term cyclical movements, as vacancy in general is very tight and this situation is likely to intensify over the coming years," Shute told a media briefing on Tuesday.

Top-grade office rents in the city's prime business center has encountered greater slides this year as investment banks and professional services providers are pulling back amid the gloomy economic outlook.

Data released by another global real estate services firm Cushman & Wakefield last week showed that Grade-A office rents in the third quarter of 2012 in Central has decreased by 19.3 percent over last year.

However, the decentralization trend has been well noted with rents in Tsim Sha Tsui and Kowloon East - the next CBD that Hong Kong government has vowed to develop - has surged 14.6 percent and 23.2 percent, respectively over the same period.

The C&W report also noted that availability rates of Grade-A offices throughout the city now stands at a low level - 1.6 percent in Tsim Sha Tsui and 3.1 percent in Kowloon East.

Even though the average availability rate of Grade-A offices in Central has climbed to 6.4 percent after many banks and professional services providers moved out of the region, the rate, in fact, is still very low, according to C&W Hong Kong's executive director John Siu.

The vacancy picture in unlikely to improve for occupiers as the supply pipeline is weak. Since only 8 million square feet of new office space is expected to be completed by 2020, which is far below the real anticipated demands, the supply of office will become rather tight given that Hong Kong is already operating at a very low vacancy rate at the moment, said the CBRE report.