The very nature of finance and banking, where companies implement hiring and firing policies in rapid response to prevailing market conditions, is a contributory factor to volatility in office markets. This is accentuated in Hong Kong by irregular supply patterns. As such, year-on-year rental growth oscillates within a +/- 10% band approximately 20% of the time in Hong Kong, compared to approximately 40% of the time in both London and New York.
Given the nature of the Central office market, where banking and financial institutions account for 55% of Grade A office space, one can expect a greater level of rental volatility.
As such, having fallen by 45% in the 12 month period following the outbreak of global financial crisis in August 2008, rental levels rallied to rise by 68% over the following two years. Rents subsequently fell by 20% between July 2011 and the end of November this year. Given this increased level of volatility, rental swings become the norm rather than the exception. Indeed, according to CBRE, there are early, but encouraging, signs that the market may be bottoming out and stronger office demand may lay a platform for growth once again.
After a sluggish start to the year, IPO activity has rebounded strongly in recent months and USD 12 billion has been raised through to the end of November, surpassing last year’s total and with a very strong December to be registered. We expect a total of approximately 25 IPO’s to be completed by year and a strong pipeline for 2014 so push this figure closer to 50.
Global economic prospects are also improving and monetary policy is expected to remain loose across all main markets in 2014. Better prospects in the US, Japan and the EU, together with signs in China of a bottoming out in economic growth and a commitment to economic reforms, point to stronger world growth in 2014. Recent statements from the US Federal Reserve indicate that monetary policy will remain loose and we expect a similar stance to prevail in Japan and Europe. Against this global backdrop, CBRE is expecting an uptick in M&A activity, much of which is likely to be carried out in Hong Kong.
The bulging IPO pipeline, together with the prospect of renewed M&A activity, must be considered in conjunction with a lack of office space feeding through into core business areas. As Mr. Rhodri James, Executive Director of Office Services for CBRE Hong Kong points out, “The lack of adequate supply in terms of size, quality and location remains a concern for larger occupiers. For example, there are no large floorplate (>10,000 sf), single landlord buildings scheduled for completion and subsequent leasing on Hong Kong Island prior to 2017”.
CBRE foresees improved performance for rents in Central going forward, but urges caution. Mr. James commented “The possibility of stronger business in the financial sector may well support demand for office space in 2014. This would not only provide a direct boost for Central landlords but would also filter down to other districts given the low vacancy rates which are a feature of the market at the moment. However, rental growth next year may be dampened somewhat by the space capacity currently held by occupiers in the banking, finance and legal professions. We are far more positive on growth prospects for 2015, when rents in core areas may begin to rise sharply”.