Rents in Hong Kong’s Central Grade A office market have been gradually gathering momentum since bottoming out in 4Q13, growing by 2.7% in 2014 and 7.0% in the first half of 2015 to reach a three-year high of HKD 96.7 per sq ft per month (net floor area).

With the run up in rents, clients are asking our leasing operatives whether growth is sustainable. The simple answer is “Yes”, for two main reasons.

Firstly, the underlying market fundamentals remain in good shape. An active leasing market pushed the vacancy rate in Central down to 1.7% in 2Q15–its lowest level since the onset of the Global Financial Crisis. As at the end of June, about 90% of the Grade A office buildings we track had vacancy rates below the frictional level of 5%, compared with about 85% during the rental peak in 2008. Moreover, rents in about 65% of those buildings were still trading at a discount—up to 43%—from their 2008 peak level. So on this basis, there is still plenty of room for landlords to push rents higher over the remainder of the year.

Secondly, rental growth should continue to be supported by the ongoing inflow of PRC financial services and securities trading firms looking to expand their international presence through Hong Kong. These firms, which accounted for about 30% of total net absorption in Central during the first half of 2015, are generally willing to pay a rental premium to secure prime Grade A office space in Central. While their initial requirements are usually small, there is plenty of scope for growth. The implementation of the Shanghai-Hong Kong Stock Connect pilot programme along with recently announced government policies to widen cross-border investment will only further encourage PRC financial services and securities trading firms to set up in Hong Kong. Though it’s probably too early to say whether the recent slump in the Chinese stock market will have a negative impact on office demand in Hong Kong, we believe that the key rationale behind them setting up offices in the city remains unchanged.

In conclusion, despite a recent slump in China and Hong Kong’s stock markets and forecasts for moderate economic growth ahead, we believe the rental growth momentum in Central is likely to be sustainable. The tight vacancy environment across the market and a rather narrow supply pipeline is likely to give landlords the upper hand in rental negotiations with tenants until the next big wave of high quality supply set to enter the market from 2017 onwards. Coupled with growing competition for office space from the PRC firms, rents in Central are likely to grow by 10-15% in 2015.

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