Hong Kong’s preliminary GDP figures for 1Q13 were released last Friday, painting a picture of tepid growth. In year-on-year terms, real GDP grew by 2.8%, which was the same as in the previous quarter and largely in line with consensus expectations. Although uncertainties in the external economic environment continued to weigh on the merchandise trade sector, which actually recorded only modest growth after removing the exports of non-monetary gold, the exports of services grew by 4.9% y-o-y, compared with growth of 2.9% y-o-y in 4Q12.

For the city’s Grade A office market, the latest figures largely correlate with what we have seen on the ground through the early part of the year. Demand, which has been driven largely by cost-saving relocations over the past 12-15 months, has more recently started to show signs of strengthening. While the top-end of the rental market remains weak, demand in the mid and lower ends of the market has been supported by a moderate pick-up in the number of tenants willing to pay a slight rental premium to secure appropriate office space, both for expansion and upgrading purposes.

This modest pick-up in demand and market sentiment led to rents in the Central office market edging up in April for the first time since May 2012. Whether the market has merely reached an inflection point or the beginnings of a broad based recovery remains to be seen but if the results of the government’s latest Quarterly Business Tendency Survey is anything to go by, the near term outlook for the market remains positive, with overall business sentiment of larger business enterprises showing improvement over the previous quarter.

Looking ahead, Hong Kong’s economy remains on track to post growth in the range of 3-4% in 2013, as forecasted by private economists. Any upside in the economy, however, is unlikely given the on-going concerns in Europe and the sequestration-induced ‘pause’ in the US recovery.

Taking into account the performance of the office market through the early part of 2013 and outlook for the economy, we believe that the Grade A office market is still likely to bottom out sometime in 2013. Any recovery, however, is likely to be weak in view of the modest growth expectations for the local economy.

About the author
Denis Ma is the Local Director for Jones Lang LaSalle in Greater Pearl River Delta, based in Hong Kong.

Need for space! That’s what Hong Kong has been shouting for in recent years and is still the most appropriate slogan today! Look at market performances this year; except for the Central CBD which is more affected by cost-saving and downsizing themes across the banking and finance sector, rents in other office submarkets as well as in other commercial sectors (retail and industrial alike) continued to climb on the back of a slowing economy. If not all of these property markets are running on extremely tight vacancies, they might deserve less impressive performance (see below table which makes reference to the Grade A office market as an example).

And we are still projecting growth for next year. To a certain extent, GDP growth is projected to show a relative improvement from this year (from 1.6% to 3.5% according to Consensus Economics) and this forms the key rationale behind our positivism. But this is not the sole reason. Very limited new supply which means a sustained tight vacancy environment also makes us believe that, rents will continue to head north in most of the commercial property markets, direction wise at least.

Yes, we admit that it is still not without risks given the overhanging uncertainties in many of the western economies. But in a market where vacant commercial space is not as easy to secure, I see little chance of seeing rents falling. At least, for markets without fundamental demand side concerns (like Central thus far this year as said before), landlords should be able to continue with their solid positions despite the need to compromise a little on growth magnitude given a higher base of comparison.

The sales market is set to follow as rental and vacancy risks are low. As long as the government is not going to implement any austerity measures that have been rumoured for a while by now, and that holding costs will stay at the current low levels, I see a high chance of capital values remaining firm next year.

About the author
Marcos Chan is the Head of Research for Jones Lang LaSalle in Greater Pearl River Delta, based in Hong Kong.

Last week, it was reported that Rykadan Capital Tower, a new 207,000-sq ft Grade A office development currently under construction in Kowloon East, was fully sold just days after it was issued with its pre-sale consent; with prices ranging from HKD 7,000-10,000 per sq ft. The remarkable sales result achieved at Rykadan Capital Tower is just the latest in a number of highlights for the Kowloon East investment market. Earlier this year, China Construction Bank acquired the whole of 18 Kowloon East for HKD 2.51 billion while a strata-titled office unit in Billion Centre was recently sold for over HKD 11,000 per sq ft. Moreover, Kowloon East has quietly become the most highly traded Grade A office investment market in the city in 2012, in terms of the number of transactions over HKD 20 million.

So what is driving investors into this former industrial enclave? There are a number of reasons.

Firstly, prices in Kowloon East are still relatively low when compared to the other established submarkets. For example, while unit rate prices in some new developments are now reaching eye-popping levels, they remain, on average, about 75% lower than in Central.

Secondly, the Kowloon East leasing market has now achieved critical mass. Over the past five years, the occupier market has close to doubled in size (to about 11.9 million sq ft) while the vacancy rate has plummeted from a high of 27.9% in 2008 down to just 3.8% at the end of October 2012. Growth has been supported by the willingness of larger multinational companies from the insurance and shipping/logistics sectors to relocate their offices from other areas in the city into the submarket.

Thirdly, the release of the government’s CBD2 blueprint along with the revitalisation policy measures has helped create an attractive long-term investment proposition. The development of Kowloon East into a future CBD implicitly suggests that prices in the submarket will rise in tandem with its emergence. The CBD2 vision also provides short-term investors a ‘story’ to sell to incoming investors.

Fourthly, and perhaps most importantly, much of the recent interest in Kowloon East has been due to the availability of investment grade properties. Over the past five years, about half of all new commercial Grade A office floor space has been built in Kowloon East, with a significant amount built purely for the sales market.

So what can we expect moving forward? If we look at the supply pipeline for Kowloon East over the next three years, almost all of the new developments are likely to be built for the sales market. Against this backdrop, investment activity in Kowloon East will likely continue to gather momentum and lend further support to prices.

About the author
Denis Ma is the Local Director for Jones Lang LaSalle in Greater Pearl River Delta, based in Hong Kong.