http://www.businesstimes.com.sg/sub/...44447,00.html?

Published June 23, 2011

S'pore to gain from HK office supply crunch

HK commercial property rents rise sharply as demand from China jumps

By REBECCA LIU


STRONG demand from mainland China and a supply crunch are causing Hong Kong's commercial property market to reach a fever pitch, with Singapore looking to benefit from rising rents in the city's office market.

'Hong Kong office rents have increased dramatically over the last two years,' said Savills' senior director of research and consultancy Simon Smith. 'That's been driven by mainland IPOs, growth in the financial services sector, and also mainland demand - demand from mainland financial institutions.'

The structure of the market - composed more of hedge funds and equities - also contributes to the sharp spike in demand as companies with front offices there are focused on a 'Greater China play', leaving little alternative for office locations. This is compounded by the 'chronic lack of new supply' in the Hong Kong market.

'It's very difficult to find developable sites in core areas. There are already concerns that firms will soon not be able to afford rents and will therefore have to limit expansion plans and limit their growth. And this is a concern in Hong Kong, but it's a very difficult problem to address,' Mr Smith said.

Singapore, on the other hand, is poised to benefit from this situation as it provides 'ample amounts of very highly specified, good-quality office space in core locations at half the price', in an environment where legal and taxation aspects are very similar to Hong Kong. '(There are) no significant legal or political risks in Singapore,' said Mr Smith.

All these will lead to a locational shift of middle and back-office functions of banks and financial institutions, and Singapore, along with Shanghai, seems to be the location of choice for firms looking to 'reweight their businesses', particularly those with regional operations who wish to keep only their front offices in Hong Kong for 'access to the Chinese market'.

According to Savills, average Prime Grade A office rents in Singapore rose by nearly 3 per cent from $8.70 per square foot (psf) a month in the first quarter of 2011 to $8.94 psf in the following quarter.

The Singapore government was also lauded as having 'succeeded well in stimulating business demand and controlling costs', and with a stable supply of office space the market could see 'double-digit rental growth' for the year ahead.

Said Savills CEO for Southeast Asia Chris Marriott: 'We're in a period of market consolidation in the next 12-24 months. . . Rents will ease off a little and improve into 2013. At the moment there is a lot of pent-up demand being released following a shortage (in office space) in 2007.'

But with employment in the finance and business services sector in Singapore growing 80 per cent from 2002 to 2010 as opposed to Hong Kong's 20 per cent over the same period, the outlook for Singapore's office market appears rosy.