Photo: The demand for office space in Hong Kong is growing. Vacant spaces are rare, however, particularly in the centre of the city. An increasing number of renters are being forced to move to the outskirts of town.

According to Morgan Stanley’s regional economist Andy Xie, Hong Kong is one of Asia’s ”lucky cities”. China’s redhot economy has businesses in the former British colony running on all cylinders. Last year, Hong Kong’s GDP grew by 7.3 percent. Record volumes of export produce from China are being shipped through the Special Administrative Region’s (SAR) harbour, while millions of tourists from the Chinese mainland are fuelling the city’s retail revenues. They were up by 16 percent in 2005. Meanwhile, financial service providers, trading houses and purchasing departments of multinational companies are expanding their staff, in order to participate even better in the China boom. The growing expatriate community is creating additional demand for offices and apartments, reinforcing Hong Kong’s optimism.

Dynamic developments in all markets
Wages are rising, unemployment is falling, and even though interest rates are ascending again, the residential sector is experiencing an upswing after months of a rather moderate development. Additional tailwind comes from the political side. The government of the Special Administrative Region recently announced, that it plans to extend the period of tax deductions for mortgages from seven to ten years. The announcement fuelled the competition between banks for mortgage customers, softening rates somewhat and pushing sales of new apartments to new heights. In February alone, transactions rose by 50 percent.

Even more dynamic is the performance of the local office market. Banks and insurance groups are expanding so fast, that existing office space on Hong Kong Island is running out. Rental prices, consequently, are advancing rapidly. Last year, they leaped by 55 percent. This development proves to be a magnet for real estate investors, who are flocking in from overseas. In 2005, prices for commercial real estate went up by 11.7 percent and are expected to rise by another ten percent in 2006. Office vacancies have reached a record low for the decade at six percent.

This is astonishing, given the recent history of the market. During the SARS (severe acute respiratory syndrome) crisis and its immediate aftermath Hong Kong’s office market nearly came to a standstill. At the same time, in 2003 and 2004 new office towers with a combined 500,000 square metres hit the market, the most prominent being ”Two International Finance Centre” with 88 stories. ”We knew we had a higher supply”, said Midland Realty’s Chief Economist Buggle Lau, ”but the economy unexpectedly accelerated so fast and demand increased massively.”

While the economic boom inflated demand for office space in top city locations, new supply plummeted to 33,000 square metres. The consequence: Grade A office units became hot commodities. For lack of available space in the city centre landlords and developers have started to channel new tenants out of the inner city districts into neighbourhoods like Quarry Bay, West Kowloon and Mong Kok. According to Colliers International, office rents in Quarry Bay surged 47 percent during the second half of 2005, while advancing a more moderate 23 percent in the finance district Central. Market observers are expecting that 80 percent of all new Grade A office buildings in the next five years will be developed outside of the city core. The most spectacular example is a 118-story office tower, which is being developed by Sun Hung Kai. It will be the tallest high-rise building in Hong Kong upon completion in 2010. Insiders are expecting the demand in this segment to rise further in the years to come. ”We talked to a lot of people in the financial services industry”, said Lo King-wai, Deputy Director for office rentals at Sun Hung Kai, ”and all of them stressed that they intend to sign for additional space.”