Hong Kong has the world's priciest offices after London

Hong Kong’s Central district remains the only market in the world - other than the West End of London - with a prime occupancy cost exceeding US$200 per square feet, a survey named CBRE Global Prime Office Occupancy Costs shows.

“Since there’s no new supply coming into Hong Kong markets due to low space availability, vacancy rates are at lows, no more than 5 per cent,” said Thomas Lam, head of valuation and consultancy at Knight Frank.

Central district, where new entrants typically take up space of between 2,000 and 5,000 square feet with just 3.9 per cent of office space being vacant, houses the Asian headquarters of numerous global banks, including HSBC, Goldman Sachs and Standard Chartered.

As the second-priciest office market globally, Central district saw occupancy costs in the third quarter of 2014 climb 7 per cent to $250.6 per square feet per year.

The major source of leasing demand in recent years in Central came from securities and wealth management firms on the Chinese mainland.

In early March 2012, the Agricultural Bank of China acquired a building in Central for its own use for HK$4.9 billion (US$632 million).

Lam told China Daily that the flood of mainland newcomers into Central throughout last year arose from speculation and high expectations of the Shanghai-Hong Kong Stock Connect program which was launched in November last year. But he did not think the boom in mainland new entrants would continue into 2015 as the stock cross-trading program is already in operation.

“In fact, demand in 2015 is expected to fall with less international and mainland newcomers,” said Lam. “With no new supply and falling demand, rents in Central and across all Hong Kong markets are expected to remain stable this year, with slight growth ranging from 0 to 5 per cent.”

However, Ben Dickinson, head of markets at JLL Hong Kong, said in a note released in December that he expects leasing demand to improve further in 2015 on the back of the city’s moderate economic growth, with office rents in major business districts growing no more than 5 per cent.

The increasing takeup by mainland companies last year also contributed much to the rebound of leasing activity in West Kowloon, which came in as the seventh most expensive office market, CBRE said.

The West Kowloon market is mainly being driven by high occupancy at Hong Kong International Commerce Centre (ICC) — Hong Kong’s tallest building. In July last year, Citigroup paid HK$5.4 billion to relocate its headquarters in Hong Kong from Central to the 118-floor ICC.

In the past five years, Credit Suisse Group AG, Deutsche Bank AG and Morgan Stanley have moved from Central to ICC amid rising rents in Central.

Low space availability and no new supply will prevent many of the big multinationals from moving around, added Lam.

A lack of office supply in Hong Kong is a commonplace in the near future. Although an estimated 2.2 million square feet of new Grade-A office supply is scheduled for completion in 2015, office supply in core business areas remains tight and most new supply is located in non-core business areas, Dickinson said.

New supply comes mainly from Kowloon East and east of Hong Kong Island, where the redevelopment of Swire Properties’ Cornwall House and Warwick House in Quarry Bay helped underpin leasing activity there, said JLL Hong Kong.

New supply led several international banks to reconsider their long-term real estate options in the city, and some are already looking at office space in non-core locations, said Dickinson.

These multinationals have seen Citigroup splash out HK$5.4 billion for a 21-storey Grade-A office in Kwun Tong in June 2014, which is the biggest deal for a whole-block commercial development in Hong Kong.