OfficeAsia | Hong Kong office leasing Tenant Representation

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Hong Kong Office Leasing Market

– Third Quarter, 2018

Grade A Office Market Summary

High rent and tight availability in Central push tenants move part/whole operation to brand new buildings in areas such as Quarry Bay, Kowloon East and Wong Chuk Hang. Decentralized demand continues driving up rent in non-core areas
Blockchain technology and cryptocurrency bring new office demand in Central
Co-working space operators gobbled up vacancy in non-core areas such as Mongkok and Hung Hom
Active pre-commitment in upcoming high-quality office towers at half the cost of Central is observed. 80% of both One Hennessey and One Taikoo Place are leased.
New developments with seaview in Kowloon East attracted consolidation demand from bank this quarter, pushing up rents to be above HKD$35 per s.f./month.
New supply from four redevelopments in Central and Admiralty will put rent under pressure from 2022/2023 onwards.

Central

In Central, transactions were dominated by PRC banks and brokerage firms. Huaxia Bank expanded 14,000 s.f. in Two IFC and Ping An Securities leased 14,000 s.f. in Citic Tower in Admiralty. HKEX expanded 13,000 s.f. in Two Exchange Square to cope with dual-class share structure IPO listing demand.

The Center is now owned by a consortium of owners. Tenants were served relocation notice to make way for owners’ occupation or subdivided sale. The uncertainty caused tenants to search for alternative options. One of the most notable transactions being Goldman Sachs moved from The Center to brand new office tower Lee Garden Three in Causeway Bay. Veolia from the Center leased space in One Taikoo Place in Quarry Bay.

Rent hiked and tight availability will not be eased anytime sooner, but new supply from recent land sale and redevelopment plans bring hope. The Murray Road Carpark 30,000 s.f. site, which was acquired by Henderson Land for HKD 23 billion last year, will be developed into a 35-storey 460,000 s.f. office building. The new building is expected to be completed in 2022.

CK Asset has announced plan to redevelop Hutchison House into a 40-storey office building this quarter. It is located across the road from Murray Road Carpark site and expected to be completed in 2023.

Another major development will be the redevelopment of Queensway Plaza. It is currently a retail podium leased to Lane Crawford. According to Planning Department’s latest report, the site can be redeveloped into a 38-storey 860,000 s.f. office tower with 4-storey retail podium and basement carparks.

The Central Government Offices West Wing redevelopment will house NGOs involved in legal and financial affairs which are currently leasing office space in Central such as the Securities and Futures Commission. All these new developments will create new supply and vacancy in Central and likely slow down pace of rental increment.

Technology brings new office demand

The emergence of blockchain technology and cryptocurrency creates new demand in office market. Leveraged bitcoin trading platform BitMEX took occupancy of a whole floor in Cheung Kong Center. Blockchain technology firm, Block.One leased 17,000 s.f. in The Centrium in Central; GIA laboratory, which will use blockchain to deliver digital diamond-grading reports in the future took 34,000 s.f. in Goldin Financial Global Centre.

Co-working space operators gobbled up vacancy in non-core areas

With one of the highest office rent and capex in the world, many startups are reluctant to commit to traditional office tenancies. Coworking space provides alternative solution. Co-working space operators are confident in this trend and pre-leased large spaces in new developments this quarter.

The most significant transaction being one of China’s biggest co-working space operator, Kr Space pre-committed 80,000 s.f. in One Hennessey Wanchai, a 300,000 s.f. office building redeveloped from former Asian House, which is expected to be completed in 2019.

Other co-working space transactions include Ucommune took 22,000 s.f. in Grand Century Place in Mongkok; Spaces currently operates in two whole block buildings took 34,000 s.f. in AXA Southside in Wong Chuk Hang; Campfire expanded three floors of over 70,000 s.f. in Harbourfront Landmark in Hung Hom.

Active pre-commitment in new high quality office buildings

New developments with good view, high quality finishes and amenities attracted decentralized tenants. Notable transactions include Fleet Management pre-committed 36,000 s.f. in South Island Place in Wong Chuk Hang, a new development expected to be completed in 2019 by Swire Properties. KPMG took over 100,000 s.f. in the building.

Apart from Kr Space 80,000 s.f. pre-commitment, Pudong Development Bank pre-leased 70,000 s.f. in One Hennessey Wanchai.

One Taikoo Place is Swire Properties’ first of two new Grade-A office towers in the Taikoo Place redevelopment project. Over 80% of the tower has been secured by major multinational corporations, including an international law firm Baker McKenzie currently in Hutchison House took five floors a total of 100,000 s.f.; Another law firm, Simmons & Simmons from One Pacific Place also leased space in the building. Facebook, a current tenant at One Island East, will move to One Taikoo Place and take up 100,000 s.f. of space. International accounting firm Ernst and Young took 150,000 s.f.. It is the second accounting firm moved out of Central. Other key tenants include Interpublic Group, Kering and MetLife Asia. Rent ranges from HK$60 to $70 per s.f. /month.

Tenants wish to decentralize to high quality new developments on Hong Kong Island will have to consider New World’s 704-730 King’s Road and Two Taikoo Place, which will be completed in 2019 and 2021 respectively.

Kowloon East

Large takeup recorded from architectural/engineering and quantity surveying sector. Rider Levett Bucknall leased 63,000 s.f. in Goldin Financial Global Centre; Arcadis leased 70,000 s.f. in Two Harbour Square.

DBS Bank consolidated operations from Millennium City Six and One Island East to Two Harbour Square in Kwun Tong, occupying seven floors a total of 190,000 s.f.. Starbucks moved from Wanchai to 35,000 s.f. in Millennium City Five.

All these transactions push down vacancy significantly and drive rent up to be above HKD$35 per s.f./month.

Infrastructure reshapes Hong Kong’s office market

Admiralty will become a major transportation hub, convergence of four MTR lines, namely the future Shatin-Central Link, South Island Line, Island Line and Tsuen Wan Line. An extension of existing Admiralty Station will be the terminus for the future Shatin-Central Link from 2022 onwards. The current bus terminus and taxi lay-bys above Admiralty MTR Stations will be preserved in the redevelopment plan. The plan also includes basement carparks.

The future 86,000 s.f. office tower connected by covered elevated walkways and amenities offering dining, retail, green spaces and convenience transport will appeal to MNCs.

New Central Harbourfront Site 3, Site 5 and Site 7 spanning from Central Post Office to Citic Tower connected by pedestrian sidewalks along waterfront promenade is going to merge eastern fringe of Central and Admiralty further into one commercial area.

Express Rail link Hong Kong Section launched recently cuts short the travel time from Hong Kong to Futian station and Shenzhen North Station within 30 minutes and 50 minutes respectively which further integrates Hong Kong economically with Southern China.

We expect more MNCs will investigate Shenzhen as location for their back operations as Grade A office rent is currently one-third of that in Hong Kong. Moving to Shenzhen also allows them tap into a vast cheaper labour market in China while retain Hong Kong staffs. Sourcing and technology sectors will likely follow the footstep of MNCs such as Walmart which moved its headquarter from Hong Kong to Shenzhen years ago.

Furthermore, Shenzhen currently being the headquarter of famous tech companies such as Tencent and Huawei Technologies, will lead the Guangdong-Hong Kong-Macao Greater Bay Area as an innovation hub in the PRC government’s plan. We will see more MNCs that wish to integrate their businesses with the latest tech know-how set up offices in Shenzhen and at the same time, look to employ financial and professional services in Hong Kong.

Disclaimer: This document has been prepared by OfficeAsia Limited for information only. Whilst reasonable care has been exercised in preparation of this document, it is subject to change and OfficeAsia Limited makes no representation as to its truth, accuracy or completeness, and accordingly cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

Hong Kong Office Leasing Market

– Fourth Quarter, 2017

Grade A Office Market Summary

To avoid high rent in Central, MNCs continued to decentralise to Causeway Bay / Wanchai and Island East. Leasing demand in Central was largely underpinned by expansion from finance and banking sector.
Both International and PRC capital backed coworking space and serviced office operators continued to expand aggressively to capture market share. We observe trend of operators leasing multiple floors of smaller floor plate in whole block office building.
Major new lettings from MNCs merged and consolidated under one roof were recorded in Kowloon East. New developments that offer large floor plate with seaview at attractive rental level are particularly appealing for large sized tenants. These traits also attracted tenants relocate within the district.

Overall Grade A office rent

Overall Grade A office rent in Hong Kong increased by 1.2%, a slight increment compared to 1.0% last quarter. Central rent had the largest increment across the board, 1.7% QoQ growth. Wanchai/Causeway recorded the second highest increment at 1.5% growth over the quarter. Grade A office rents in Island East and TsimShaTsui both increased by 0.9%. Despite strong takeup, Kowloon East felt the pressure from ample new supply. Rents in Kowloon East slightly dropped by 0.2% over the quarter.

Finance and banking sector drives demand in CBD (Sheung Wan, Admiralty and Central)

Leasing demand in Central was largely underpinned by expansion from finance and banking sector owing to buoyant stock market. New lettings from PRC firms slowed down this quarter, but still made up over 67% of new lettings in Central.

New lettings from finance & banking sector in CBD

Tenant	Building	Gross Area (approx. sq.ft.)
Hong Kong Exchange and Clearings	One Exchange Square	13,900
China Galaxy Finance	Wing On Centre	18,300
China Industrial Bank	Three Exchange Square	59,000
Bank of Communications	Man Yee Building	10,000
Bank of Singapore	One IFC	16,600
China Development Bank	One IFC	8,300

US law firms relocated within Central and leased 7,000 sq.ft. in Jardine House. Two new law firms leased approximately 14,000 sq.ft. in Edinburgh Tower.

Active decentralisation

To avoid high rent in Central, MNCs continue to decentralise to Causeway Bay / Wanchai and Island East. For example, Maybank / KimEng currently in Wanchai and Admiralty consolidated and pre-leased 35,800 s.f. Lee Garden Three. Mediterranean Shipping in The Center leased Lee Garden Two.

In addition to two law firms moved out of Central to Island East earlier this year, an international business consultancy FTI Consulting in The Center leased 16,200 s.f. to Oxford House. Currently in Central, Prada pre-committed to One Taikoo Place in Island East. Another example was Taipei Fubon Bank in Central Tower pre-committed to K11-Atelier in Tsimshatsui. Carnival Group moved from AIA Central to Wanchai 9,800 sq.ft.

Covestro leased 20,000 sq.ft. in One Island East. An UK biopharmeutical firm AstraZeneca moved from Wanchai to a new development 18 King Wah Road in Fortress Hill 18,000 sq.ft.

Aggressive expansion from coworking and serviced office operators

High fitout cost and headcount uncertainty pushed startups and some MNCs to avoid long term leases. Apart from international operators, PRC capital backed coworking space operators also expanded aggressively to capture larger market share. URWork, backed by Alibaba-affiliate Ant Financial and Sequoia Capital leased 11,000 sq.ft. in Grand Millennium Plaza in Sheung Wan.

We observe some operators committed to multiple floors in brand new or upgraded buildings with smaller floor plate. Spaces, a subsidiary of Regus, leased whole block of Sun House 70,000 sq.ft. in fringe Central. Sun House has floor plate size of approximately 3,600 sq.ft.. The Executive Centre leased 12 floors in Chinachem Central Two, floor plate size is approximately 2,700 sq.ft. Shanghai-based coworking space operator Naked Hub, launched its 16-floor operation in Bonham Strand in Sheung Wan. Each floor is approximately 3,500 sq.ft.

Traditional serviced office operators remained committed to large floor plate in Grade A offices. Regus took 27,000 sq.ft. in Lee Garden Three. 50% of Lee Garden Three was committed to date. WeWork continued its expansion. In addition to its Causeway Bay and Wanchai operations, WeWork leased 80,000 sq.ft. in LKF Tower and two floors 58,300 sq.ft. in Mapletree Bay Point in Kowloon Bay.

Strong consolidation demand in Kowloon East

Leasing transactions of MNCs merged and consolidated under one roof were recorded in Kowloon East. New developments that offered large floor plates with seaview at attractive rental level were particularly appealing for large sized tenants. These traits also attracted tenants relocate within the district.

Ocean Network Express, a joint venture of three Japan-based container shipping carriers, K-Line, Mitsui O.S.K. Lines and NYK merged and moved to Two Harbour Square 59,500 sq.ft.. Otis Elevator moved from Island East to Goldin Financial Global Centre 52,000 sq.ft..

Now TV leased three floors 100,000 sq.ft. in Goldin Financial Global Centre, the largest leasing transaction in Kowloon this year.

Tenants relocated within district for higher building quality are also observed. Cannon upgraded to a brand new building China Life Centre Tower A 51,100 s.f. in Hung Hom. Mott Macdonald moved from Landmark East to a whole floor in Mapletree Bay Point 36,300 sq.ft.

Disclaimer: This document has been prepared by OfficeAsia Limited for information only. Whilst reasonable care has been exercised in preparation of this document, it is subject to change and OfficeAsia Limited makes no representation as to its truth, accuracy or completeness, and accordingly cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

Hong Kong Office Leasing Market

– Second Quarter, 2017

Grade A Office Market Summary

Tenants decentralisation gathered pace this quarter. Rental premium in core CBD drove tenants to non-core areas such as Quarry Bay and Wong Chuk Hang to capture significant rental savings of approx. HKD$60-100 per sq.ft..
Spaces left by decentralised tenants are taken up by Mainland Chinese firms. Over 69% of transactions in core CBD were from this group of tenants.
CBD tenants with expiry in late 2017 onwards were offered long term cost saving options in upcoming developments such as Lee Garden Three, One Taikoo Place and 18 King Wah Road on Hong Kong Island.
New serviced office operators such as WeWork, Work Project, Eaton House, etc. leased approx. 240,000 sq.ft. office space in 2016 to profit from the trend of corporations moving staffs to serviced office. Another new coworking space operator leased space in fringe CBD this quarter.
Insurance sector continued to expand in Kowloon such as Hung Hom and Kowloon East

CBD (Central, Admiralty and Sheung Wan)

High rent drove sectors that are traditionally tied to Central to relocate majority of their operations to decentralised areas such as Quarry Bay. Tenants captured rental savings of over $60 per sq.ft. Law firm Freshfields Bruckaus Deringer leased two floors in One Island East. Mitsubishi UFJ Financial Group relocated part of their operations to Quarry Bay. BNP Paribas will relocate to Lincoln House in Quarry Bay later this year. The 80,000 sq.ft. vacated space will be taken over by a mainland conglomerate HNA Group. It also leased 14,000 sq.ft. at Two International Finance Centre.

Mainland Chinese firms continued to take up vacancy in Central and Admiralty. An asset management firm SFund leased a whole floor 9,000 sq.ft. in Bank of China Tower for expansion. In addition to 110,000 sq.ft. space currently occupied in 60 Gloucester Road in Wanchai, Huarong expanded 37,000 sq. ft. in Two Pacific Place. China Securities International leased whole floor 12,000 sq.ft. at Two Exchange Square; Bank of Communications leased 8,300 sq.ft. in Wheelock House.

New coworking space operators such as WeWork, Work Project, Eaton House, etc leased a total of 240,000 sq.ft. office space in 2016 to meet the increasing demand from new startups and finance sectors. They try to avoid long term real estate cost commitment in face of market volatility and fluctuating headcounts. These coworking space operators mainly leased space in Causeway Bay, Wanchai and Central. Another operator, naked Hub leased 34,000 sq.ft. in Nos. 40-44 Bonham Stand in Sheung Wan this quarter.

Wong Chuk Hang

Wong Chuk Hang absorbed strong cost saving demand from core CBDs. Rental range of $20-$30 per sq.ft. and shortened travel time to CBD by South Island MTR line encourage corporations to relocate to the area. Most of transactions are recorded in 41 Heung Yip Road. Mayer Brown JSM, for example, moved its back office from Central to a whole floor. Meridian Asset Management relocated from Agricultural Bank of China Tower in Central to the building. Fashion brand Valentino moved from Wanchai to the building. Equal Opportunity Council and Independent Insurance Authority took up a total of approx. 73,000 sq.ft..

Vacancy in Wong Chuk Hang will soon be fully filled. The next two upcoming projects will be Nos. 8-10 Wong Chuk Road jointly developed by Swire and China Motor Bus scheduled for completion in 2018 and Aberdeen Inland Lot No. 462 development jointly developed by Imperial Group and Sino in 2021.

Causeway Bay and Wanchai

Core CBDs tenants facing HKD$90-100 per sq.ft. renewal rent have strong desire to lock in lower long term rent. Landlords of several new developments were competing to attract this group of tenants.

Two banks in Central pre-committed in Lee Garden Three in Causeway Bay, which is scheduled to complete in late 2017. Two insurance and risk management firms currently in the area merged and pre-committed in Lee Garden Three. Another decentralized tenant, Mediterranean Shipping moved from The Center to 16,000 sq.ft. in Lee Garden Two.

Kowloon

One Island East in Quarry Bay benefited from tenant decentralization. However, the lack of secondary supply and rental levels pushed some tenants to consider more cost-effective options in Kowloon East. Tenants facing renewal rent on average $47 in Hong Kong East were attracted by buildings in Kowloon Bay that were relatively new and asking for competitive rental ranges from approx. $28 to $38 per sq.ft.

Despite strong competition from Wong Chuk Hang, leasing momentum in Kowloon East improved this quarter. GURU online relocated from North Point AIA Tower to KOHO in Kwun Tong. Century Distribution Systems relocated from North Point to 8,700 sq.ft. in Millennium City 5.

Insurance sector took up large spaces in Kowloon East. Principal Insurance leased 19,200 sq.ft. Millennium City 6 and Sun Life Hong Kong leased 34,700 sq.ft. in The Harbourfront Tower 2. AIA expanded in-house by 8,700 sq. ft. in The Gateway Tower 6. In addition, Benetton moved from Tsimshatsui to 15,600 sq.ft. to Goldin Financial Centre, a brand new development in Kowloon Bay.

Disclaimer: This document has been prepared by OfficeAsia Limited for information only. Whilst reasonable care has been exercised in preparation of this document, it is subject to change and OfficeAsia Limited makes no representation as to its truth, accuracy or completeness, and accordingly cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

Hong Kong Office Leasing Market

– First Quarter, 2016

Grade A Office Market Summary

Takeup of office space by PRC firms slowed down.
New developments scheduled to complete in 2016 failed to ease shortage of large floor plate quality building. Rents on Hong Kong Island continued to go up.
To ease tight supply, HKSAR government rezoned Queensway Plaza into commercial usage and included Murray Road Multi-storey carpark site in the Land Sale List
Insurance groups continued to fill up large bulk spaces. Two of the largest transactions being Prudential leased approx. 69,000 sq.ft. in Kwai Chung and AXA Insurance leased approx. 63,000 sq.ft. in Wong Chuk Hang.
Citigroup large scale relocation to self-owned headquarter in Kowloon East spared space in Dorset House to accommodate demand from Warwick House and Cornwall House tenants.
In Kowloon East, landlords were under pressure to offer attractive rental as vacancy increased due to Hang Seng Bank and Manulife large scale relocation to their self-owned buildings.
Affected by sluggish exports, we witnessed logistics/shipping companies relocated to Kowloon East for cost savings.

CBD (Central, Admiralty and Sheung Wan)

The demand stemmed from Shanghai-Hong Kong Stock Connect Scheme gradually slowed down over the last quarter. Despite softened demand, tight vacancy and shortage of large floor plate supply continued to drive up CBD rent, though at a much smaller pace of 3.7% compared to 4.8% in Q4 2015.

While PRC firms favoured prestigious core CBD location at premium rent, cost-conscious multinational corporations (MNCs) in particular banks and law firms tried to reduce cost by decentralising, consolidate operations or downsizing. We witnessed a number of sublease or break lease cases.

An example being Mizuho Bank consolidated its operations from Pacific Place, Charter House and The Gateway into a new development in Tsimshatsui. A law firm in Citibank Plaza will move to Hong Kong East, the first case among international law firms.

The scheduled completion of Shanghai Commercial Bank Tower and Chinachem Central One in 2016 offered approx. 4,366 sq.ft. and 2,400 sq.ft. offices per floor respectively. Finance firms were particularly keen. However, these development offered no relief to large floor plate demand in CBD.

To ease tight supply, HKSAR government rezoned Queensway Plaza into commercial usage with the potential to supply 1 million sq.ft.. In addition, Murray Road Multi-storey carpark site (IL 9051) was included in 2017 Land Sale List, which will offer 448,900 sq.ft. office space. This future development is expected to relief tight supply situation in CBD at the earliest by 2020/2021.

Causeway Bay & Wanchai

With availability in CBD tightening, companies with expansion requirements opted to relocate to Causeway Bay/Wanchai at discounted rent. Lower vacancy rates was recorded and rent went up by 3.1% this quarter.

In Causeway Bay, Manulife’s moved from Lee Garden One to self-owned headquarter in Kowloon Bay made way for tenants that required over 10,000 sq.ft floor plate. An example being Vistra Corporate Services consolidating its operations into two and a half floors in Lee Garden One. Consolidation has cost reduction benefit due to the elimination of duplicated supporting facilities. A listed PRC company, Shifang Group leased a high floor in Lee Garden One.

Causeway Bay being a stronghold of IT tech giants such as Google and Oracle attracted another US web tech company, Akamai Technologies to lease space in Hysan Place. An US co-working space operator, WeWork leased approx. 90,000 sq.ft. in Tower 535.

Wanchai remained a popular headquarter location among PRC listed conglomerates and securities firms.

BC Financial Group expanded from Hip Shing Hong Centre in Central to a whole floor 6,895 sq.ft. in Luk Kwok Building. Guotai Global Investments leased 4,935 sq.ft. in 28 Hennessey Road.

On the investment side, MassMutual Tower owned by Chinese Estates was purchased by Evergrande Real Estate Group at HK$12.5 billion, a record unit price of approx. HK$36,190 per sq.ft. A joint venture formed between China Everbright Limited and Everbright Real Estate Limited, acquired Dah Sing Financial Centre from SEA holdings at HK$10 billion, an unit price close to HK$25,000 per sq.ft.

Hong Kong East

Vacancy dropped to 1.7%, the lowest across the board. Rent increased by 1.3% this quarter.

Citigroup moving to self-owned headquarter in Kowloon East spared large pockets of space in Dorset House to accommodate tenants from Warwick House and Cornwall House, which are scheduled for demolition in 2016 and 2017 respectively.

L&O Architects, Wallem Shipping, British Telecomm and Nielson moved to Dorset House. QBE Insurance moved to Oxford House. Oxford University Press and Beckman Coulter left Swire Portfolio for One Kowloon and Landmark East in Kowloon East respectively.

Wong Chuk Hang

The presence of Lane Crawford in One Island South attracted various fashion groups moved into the area such as Stuart Weitzman, Farfetch.com, La Perla, etc.

With South Island Line launches at the end of 2016, Wong Chuk Hang will be less than 10 minutes away from Admiralty, which offers large tenant occupiers back office location alternative to Quarry Bay and Kowloon East.

AXA committed to approx. 63,000 sq.ft. in Vertical Square to capture attractive rental package before the area become accessible.

Apart from AXA, we noted that various insurance groups continued to take up large bulk spaces outside CBD. One of the largest transactions being Prudential leased approx. 69,000 sq.ft. in Metroplaza Tower 1 in Kwai Chung; Aviva Insurance leased approx. 32,000 sq.ft. in One Kowloon; AIA leased approx. 19,000 sq.ft. in The Gateway Tower 1, Tsimshatsui.

Kowloon

One Island East in Quarry Bay benefited from tenant decentralisation. However, the lack of secondary supply and rental levels pushed some tenants to consider more cost-effective options in Kowloon East. Tenants facing renewal rent on average $47 in Hong Kong East were attracted by buildings in Kowloon Bay that were relatively new and asking for competitive rental ranges from approx. $28 to $38 per sq.ft.

In addition, Benetton moved from Tsimshatsui to 15,600 sq.ft. to Goldin Financial Centre, a brand new development in Kowloon Bay.

Kowloon East

Significant drop in exports prompted shipping/logistic sector to seek cost reduction through relocation. Hamburg Süd moved from Two IFC to AIA Tower Landmark East; Kuehne & Nagel moved from MassMutual Tower Wanchai to Manhattan Place.

While space is limited on Hong Kong Island, Kowloon becomes a tenant’s market. Hang Seng Bank and Manulife large scale relocation left Enterprise Square Five and Manulife Financial Centre with sizable vacancy. In addition, the completion of Goldin Financial Global Centre will add approx. 852,000 sq.ft. gross floor area into the area.

Landlord positions are weakened amid increasing vacancy. We witnessed that attractive rental package was offered.

Rent in Kowloon East adjusted downward by 1.2% this quarter. This downward trend will likely to persist in the second half of 2016.

Outlook

With the expected launch of Shenzhen-Hong Kong Stock Connect, we believe PRC finance firms will remain as main demand driver that support CBD rents in the second half of 2016. Existing vacancy and new supply in Central i.e. Chinachem Central One & Two will gradually be filled by finance sector.

With uncertain economic outlook and slower growth in China, MNCs are cutting headcount and cost. They try to avoid incurring CapEx unless relocation presents significant rent reduction throughout the lease term. Renewal or moving to surrendered fitted space is still preferred.

Nos. 14-30 King Wah Road is the only development that will offer over 10,000 sq.ft. gross floor area floor plate on Hong Kong Island from now to 1Q, 2017. The problem of large floor plate shortage in CBD (Central, Admiralty and Sheung Wan) remains. Existing high rent will inevitably continue to rise in the second half of 2016 until tenants are presented with alternatives at lower rent. For instance, K11 Office in Tsimshatsui is two MTR stations away from Central and has 26,900 sq.ft. gross area floor plate with full seaview. This will create real competition for buildings in CBD especially those that are currently asking for over $120 per sq.ft.

In 2017, Grade A office supply will peak. However, 90% of the total 2.4 million sq.ft. supply comes from Kowloon. The potential of cost savings and premium quality buildings in Kowloon will attract tenants that are not traditionally tied to the CBD. As major supply on Hong Kong Island such as Lee Garden Three (approx. 317,000 sq.ft.) and Somerset House Redevelopment (approx. 930,000 sq.ft.) scheduled to complete in 2018, rents are expected to eventually adjust downward across the board.

Major Grade A Office Supply in 2017

District	Development	Developer/Owner	Total Floor Area (NFA approx. sq.ft.)
Fortress Hill	Nos. 14-30 King Wah Road	Henderson	256,100
Tsimshatsui	K11 Office	New World	282,600
Kwun Tong	180 Wai Yip Street	SHK & Wong’s	383,400
Kowloon Bay	348 Kwun Tong Road	Mapletree	532,000
Kowloon Bay	NKIL 6312	Swire	511,000
Kowloon Bay	NKIL 6311	Pacific Investment	233,100
San Po Kong	33 Tseuk Luk Street	SHK	147,200
Hunghom	One Harbourfront Extension	Cheung Kong Property	79,200

Disclaimer: This document has been prepared by OfficeAsia Limited for information only. Whilst reasonable care has been exercised in preparation of this document, it is subject to change and OfficeAsia Limited makes no representation as to its truth, accuracy or completeness, and accordingly cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

Hong Kong Office Leasing Market

– First Quarter, 2015

Office leasing market experienced improved sentiment in Q1 2015. The positive impact of Shanghai-Hong Kong Stock Interlink extended from equity market to office market this quarter. Overall Grade A office net take-up returned to growth and overall rent increased by 2.1% QoQ.

On Hong Kong Island, demand was largely supported by medium sized bank and finance firms. Insurance and shipping companies continued to expand in Hong Kong East, Kowloon East and Kwai Chung.

Recent Leasing Transactions – Insurance Sector

Tenant	Building	Submarket	Size (approx. sq.ft.)
MassMutual	Kowloon Commerce Centre Tower 2	Kwai Chung	14,000
China Life Insurance	Metroplaza Tower 1	Kwai Chung	5,400
FWD	Metroplaza Tower 1	Kwai Chung	12,000
Prudential	Berkshire House	Hong Kong East	30,000
AXA	Manhattan Place	Kowloon East	14,000
RSA Insurance Group	One Island East	Hong Kong East	20,000

CBD (Central, Admiralty and Sheung Wan)

Among the key submarkets, CBD recorded the strongest growth in rent. Rent went up by 2.4% QoQ to HK$91.3 per sq.ft. effective.

Champion REIT leased large spaces in Citibank Plaza to multi-national finance companies over the last two quarters. BlackRock leased 67,000 sq.ft., Reuters took 33,000 sq.ft., Bloomberg (currently in Cheung Kong Centre) expanded and leased 33,000 sq.ft. in Citiabnk Plaza. Hong Kong listed conglomerate Fosun and printing firm Hua Jun both leased over 10,000 sq.ft. in the building.

China Bohai Bank leased 2,700 sq.ft.in Two ifc. Bank of Beijing moved from The Center to 13,000 sq.ft. in Two ifc. Previous tenant of the space Commerzbank moved to The Lee Gardens.

Commonwealth Bank of Australia expanded 2 floors in the One Exchange Square.

Hong Kong East

Vacancy dropped to 1.1%, the lowest across all submarkets. Rent increased by 1.3% to HK$45.7 per sq.ft. effective.

There were continuous relocation from Warwick House and Cityplaza Three due to Swire’s redevelopment plan. Arts Development Council from Warwick House leased a whole floor 11,000 sq.ft. in 1063 King’s Road. Schneider Electric leased 34,000 sq.ft. Kerry Centre. Dimension Data from Cityplaza Three leased a whole floor in Oxford House. Leo Burnett moved out of Cityplaza Three to Level 6 in Landmark East-AIA Tower.

Activities in Hong Kong East were also supported by insurance and finance companies. BNP Paribas expanded in PCCW Tower by 14,000 sq.ft. Athena Financial Group leased 11,000 sq.ft. in Berkshire House. RSA Insurance Group merged with Allied World Assurance and consolidated 20,000 sq.ft. in One Island East.

On the other hand, cost cautious tenants captured $15 per sq.ft. rent difference by relocating to Kowloon East. For examples, British Petroleum and ZIM Shipping moved out of Hong Kong East to Kowloon East.

The shrinking availability is expected to limit option availability for tenants in 2015 and 2016. The tight availability is expected to continue until Citigroup relocates to its owned building and Somerset redevelopment completes.

Kowloon East

Notable transactions were recorded in a few buildings.

ZIM Integrated Shipping took 2 floors 42,000 sq.ft. in Pioneer Place. Levi Strauss jeans leased one and a half floors in Millennium City One – Standard Chartered Bank Tower.

Shipping company OOCL and chocolatier Ferrero Rocher leased three floors 54,900 sq.ft. and one floor 18,000 sq.ft. respectively in One Harbour Square.

Kwai Chung

Traditionally a logistic and container terminal, Kwai Chung is now back offices for banks and insurance companies. Shanghai Commercial Bank purchased three floors in Kowloon Commerce Centre Tower 2. It becomes another bank housed its back office KCC after Bank of America Merrill Lynch and Construction Bank of China.

China Life Insurance and FWD Insurance both leased space in Metroplaza Tower 1. MassMutual took majority portion of a whole floor 14,000 sq.ft. in Kowloon Commerce Centre Tower 2.

Grade A office rental growth

District	Q1 2015 Effective unit rent	QoQ growth
CBD	$91.3	+2.4%
Hong Kong East	$45.7	+1.3%
Wan Chai & Causeway Bay	$58.8	+0.9%
Kowloon East	$31.0	+1.3%

Outlook

Mutual recognition of funds between Mainland China and Hong Kong and the Shenzhen-Hong Kong stock interlink are to be launched in July and Q4 2015 respectively. These are going to further drive up leasing demand from asset management and securities firms. The required reserve ratio cut stimulus in China will continue to flood the economy with liquidity and hence, expansion demand from mainland corporates remains strong in the next half of 2015.

On the contrary, large multinational banks and global wealth management firms in Greater Central remain cost cautious as global banking regulations tightened after 2008. Unless there are more than HK$15 per sq.ft. rent difference, high fitout cost eliminates large portion of rent savings. These firms will choose to renew.

On the supply side, low vacancy and limited supply of new office developments on Hong Kong Island will limit viable relocation options for tenants. Tenants that are not traditionally tied to core CBD area will capture the $15 to $20 per sq.ft. rent difference between Hong Kong Island and other submarkets.
They will move to Kowloon and New Territories where relatively new and high quality buildings with large floor plates are offered. The rent of these areas are expected to increase steadily.

Hong Kong Island will have new office projects that offer contiguous floors and large floor plate from 2017 onwards. New developments include Asian House Redevelopment, No. 14-30 King Wah Road, Sunning Plaza Redevelopment, Swire’s Project 2A, Swire’s Kowloon Bay Development, etc.

Disclaimer: This document has been prepared by OfficeAsia Limited for information only. Whilst reasonable care has been exercised in preparation of this document, it is subject to change and OfficeAsia Limited makes no representation as to its truth, accuracy or completeness, and accordingly cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

Hong Kong Office Leasing Market

– First Quarter, 2014

Central

Leasing activities in Central increases over the last quarter, largely underpinned by new lettings from the banking and finance sector. Brown Brothers Harriman, an US investment bank moves from International Commerce Centre in Tsimshatsui and leases 11,460 sq.ft. in Man Yee Building. Another large transaction in this quarter, United Overseas Bank leases 2 floors in Citibank Plaza.

Demand from PRC finance and securities firms remains strong, pushing down the vacancies of core Grade A office buildings in Central. Cinda Asset Management leases 15,500 sq.ft. in AIA Central this quarter. China Securities leases a whole floor 13,107 sq.ft. in Exchange Square Two. Shanghai Pudong Development Bank expands and takes a whole floor at Bank of America Tower.

Many whole floors are available in Central due to various relocations within Central due to consolidation of operations.

This will create opportunities for tenants to take advantage of vacancy.

Hong Kong East

Vacancy in Hong Kong East is 1.7%, the lowest across the broad, mainly due to the continue decentralisation of international corporations and monopolization of Swire Properties in the area. In December 2013, the company increases its presence in this area by acquiring 50% ownership of DCH Commercial Centre, an office building with a gross floor area of approximately 389,000 sq ft located at 25 Westlands Road.

Swire announced its concrete plan to redevelop Cornwall House, Warwick House and Somerset House into two Grade A office buildings. It reaches agreement with the HKSAR Government to exchange ten floors of Grade A office space in Cityplaza Three (approximately 205,000 square feet of gross floor area) for all the areas in Cornwall House currently owned and occupied by the HKSAR Government.

Kowloon East

Vacancy rate is increasing in Kwun Tong due to the completion of new projects and the leasing of strata premises that are originally for sale though now for lease.

With some asking rental rates as low as HK$22.00 psf (G). This area presents attractive rental levels when compared to more established districts.

Billion Development expresses its intention to launch stratified-sale of two Grade A office developments in 2015. These projects include 15-17 Chong Yip Street and 10 Shing Yip Street in Kwun Tong.

Outlook

With the direct share-dealing between Hong Kong and Shanghai stock markets expected to be launched later this year, OfficeAsia expects demand from PRC finance and securities firms will continue taking up existing vacancies in Central.

On the other hand, without concrete signs of global economic recovery, international firms remain cautious on expansion. Landlords are now willing to offer more attractive incentives to attract tenants as surrendered spaces from some international firms accumulate.

OfficeAsia expects Central rents will remain under downward pressure.

The completions of office is estimated to be approximately 1.6 million sq.ft. in 2014. The completions of office is expected to reach 2.98 million sq.ft. in 2015, a 86% year-on-year increase. Kwun Tong takes up 60% of the total office supply in 2015, the highest across the broad.

OfficeAsia expects rent in Kowloon East will experience downward pressure from now to 2015.

Major Grade A Office Supply, 2015 – 2017

District	Address	Developer	Net Floor Area (approx. sq.ft.)
Central	22 Des Voeux Road	Chinachem	65,000
Central	Wing On Central Building Redevelopment	Chinachem	106,000
Wan Chai	Asian House Redevelopment	Chinachem	236,000
Causeway Bay	Sunning Plaza Redevelopment	Hysan	340,000
Wong Chuk Hang	50 Wong Chuk Hang Road	Sun Hung Kai	84,000
Wong Chuk Hang	41 Heung Yip Road	Cheung Kong	259,000
Kowloon Bay	Goldin Financial Global Square	Goldin Group	680,000
Kwun Tong	43-45 Tsun Yip St.	Yau Lee Group	77,000
Kwun Tong	10 Shing Yip St.	Billion	198,000
Kwun Tong	15-17 Chong Yip St.	Billion	200,000
Kwun Tong	52-56 Tsun Yip St.	Billion	298,000
Hung Hom	One Bay East, East Tower	Wheelock	410,000
Hung Hom	One Bay East, Manulife Tower	Wheelock	410,000

Disclaimer: This document has been prepared by OfficeAsia Limited for information only. Whilst reasonable care has been exercised in preparation of this document, it is subject to change and OfficeAsia Limited makes no representation as to its truth, accuracy or completeness, and accordingly cannot be held responsible for any liability whatsoever or for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.