Why Central office rents will fall by 5% in next 2 years

This is despite investors’ optimism.

According to Barclays, at the start of the 2014, an increase in net hiring intentions triggered a surge in optimism among investors that the Central office rents may finally start to rise after falling for 18 consecutive months.

The Hudson Report for 1Q14 showed that overall net hiring intentions rose from 27.6% for 4Q13 to 32.2% for 1Q14. By sector, the recruiting agency’s report showed that the Banks and Professional Services sector indicated the largest quarterly pickup with net hiring intentions up from 36.7% in 4Q13 to 49.5% in 1Q14.

Here’s more from Barclays:

Anecdotally, leasing agents and office landlords have also reported a pickup in leasing inquiries as well as bona-fide offers (See Champion REIT: Trading rents for occupancy), but to date, new lettings continue to be underpinned by smaller office spaces.

According to global real estates services firm Jones Lang LaSalle (JLL) in its Hong Kong Property Market Monitor for February 2014, the net office take up in January 2014 was only 69,400sf while Central and Hong Kong East saw net withdrawals of 11,600sf and 40,200sf, respectively.

On the vacancy front, the Central office vacancy rate remained unchanged at 4.6% for January while the overall market was also unchanged at 4.3%.

We believe Champion REIT’s recent decision to trade rents for occupancy and willingness to accept longer term fixed rate leases will inevitably affect the pricing power of other Central and non-Central landlords.

While selective landlords with very high occupancy rates for their properties may decide to do the opposite and trade occupancy for higher rents, we believe it will be difficult to put through any rental increases.

Overall, although we do not see a significant correction in Central rents (our estimates call for Central rents to fall 5% in each of 2014 and 2015), we believe a rebound will remain elusive.