Why Kowloon's office space market will be the hottest hub by 2015

Clue: investors to owner-occupiers.

While office rents are rising fast in Hong Kong office leasing market, sales momentum in the Kowloon office has picked up, and with fit-out and renovation costs going through the roof every year, new leasing transactions have witnessed a drop in recent years.

According to a release from Colliers International, on the other hand, office sales transactions from the owner-occupier pool have doubled since last year and the trend looks set to grow.

“The prolonged low interest rate environment since the outbreak of the global financial crisis has drawn more office occupiers to acquire offices for their own use,” says Joanne Lee, Manager of Research and Advisory Services at Colliers International Hong Kong.

“Negative real interest rate is predicted to sustain between at 2015 to 2016, sales activity is expected to be active during the period."

“Some firms with strong cash flows and purchasing power can benefit from consolidating the majority of their operations under one roof, with the increase in operational efficiencies, potential rental savings and also future certainty of occupancy costs and tenure as a long-term owner occupier.”

Recent indications of office buyers are mainly office occupiers including industrialists and small-to-medium enterprises acquiring offices for owner occupation, such as expansion, upgrading or relocation. There is also a growing trend for banks and insurance company to purchase the entire office building for long-term occupation.

Here’s more from Colliers International:

“Some banks have been buying the entire office buildings for their own use. In 2012, Agricultural Bank of China and China Construction acquired 50 Connaught Road and Kowloon Bay 18 respectively to consolidate their operations in one building. The recent acquisition of Citi of East Tower, One Bay East all indicate that the trend is here to stay,” says Fiona Ngan, General Manager, Office Services, Kowloon.

“One of the driving forces for these sales transactions is the rising fit-out and relocation costs which are outpacing inflation. Office fit-out cost rose by HK$70 - HK$100 per sq ft in 2014 as compared to two years ago,” Fiona continues.

“The fit-out cost has recorded a 10% increase in the last three years surpassing the inflation rate of 4%. As a result, tenants were reluctant to move given the high cost of relocation and prefer to purchase to better manage their cost and for long-term occupation.”

Looking into the leasing transactions, there is a sharp drop in leasing activities. For leasing area of 10,000 – 19,000 sq ft, the number of transactions dropped from 78 in 2013 to 32 this year. For sizeable office space of over 20,000 sq ft, the number of leasing transactions have fallen from 34 in 2012 to 11 in 2014.

“The lack of quality office supply in Hong Kong has always been a challenge for many large occupiers. High rents as well as high fit-out costs now pose a bigger challenge for companies seeking large office spaces,” Fiona points out.

“At the same time, of the sales transactions in Kowloon office market for over 8,000 sq ft, about 60% of the sales recorded in 2014 are for self-use, doubled that of the year before and more than triple as compared to 2012.”

Overall demand for office space in Hong Kong continues to strengthen in the next few years. In early 2015, approximately 872,800 sq ft of new office supply in Kowloon East are expected to become available for sale,” says Fiona. “However, from 2016 onwards, new office supply available for sales in core area will be limited.”

Given the increasing fit-out cost, Colliers anticipates that a lot of tenants are becoming buyers and eventually owners as they tend to buy the space for own use over relocating every few years. With supply tightening in the next few years, a bull run in overall office sales transactions is in tow come 2015.