Sep 26, 2008


Property prices, rents set to fall in Asian cities

HONG KONG: Property prices and rents in Asia's financial centres of Hong Kong, Singapore and Tokyo are set to fall as banks scale back hiring and investments in the global financial turmoil.

But while banks lay off tens of thousands in the United States, in Asia they are more likely to step back from ambitious expansion plans, so property markets will slip rather than slide.

In Hong Kong, property agents were scrapping to clinch a deal to put new tenants into three floors at the IFC2 building occupied by Lehman Brothers, which could have won them as much as US$2million (S$2.8 million) in commission.

But with Nomura Holdings snapping up Lehman's Asia operations, the Japanese bank will probably keep most of the space as its own Hong Kong office is in the same building.

However, a reshuffling of tenants in the city is still likely.

Although the Central district, dominated by landlord Hongkong Land, is chock-a-block, rents will probably fall by 25 per cent by the end of next year as cheaper new offices across the harbour hit the market, says Macquarie Securities.

'There's a lot of supply coming on to the market,' said Mr Richard Pyvis, chairman of CLSA Capital Partners, which runs private equity property funds. 'Just look at that big joint out there,' he added, pointing across Hong Kong's harbour to the 118-storey International Commerce Centre (ICC) built by Sun Hung Kai Properties.

With prime Hong Kong office rents almost quadrupling since Sars ravaged the economy in 2003, the likes of Morgan Stanley, Credit Suisse and Deutsche Bank have agreed to move to the ICC building.

But now they could choose not to take up options for more space, or even off-load some.

'Lots of banks are committed to long leases but some tenants could look to sub-lease space like they did after the bubble burst,' said a property agent who works with several global banks but asked not to be identified because of commercial sensitivity.

'That will put pressure on rents.'

The situation is similar in Singapore.

A whole new office project called the Marina Bay Financial Centre (MBFC) is under construction, spurred by the creation of 50,000 jobs since 2004 as hedge funds and banks lapped up incentives to expand in the city-state.

A loss of a fifth of those new jobs would cause monthly office rents to fall 47 per cent and capital values to drop 34 per cent by 2012, according to UBS analyst Regina Lim. It would hit landlords such as City Developments and CapitaCommercial Trust.

Mr Wilson Kwong, general manager of the management firm for MBFC, said two-thirds of the 150,000 sq m of office space in the project's first phase had been pre-leased, but conceded that some tenants might choose to sub-let space if they could not fill it.

The US$2 billion development, built by a venture between Cheung Kong Holdings, Hongkong Land and Keppel Land, will eventually provide over 300,000 sq m of office space.

'Given the current uncertainty in the global economy, we expect some caution from larger corporations with their leasing commitments,' Mr Kwong said.

'But many international companies still see Asia as an engine of growth and are confident of Singapore's role as a key hub in the regional and global financial systems.'

In Tokyo, more gloom will fall on the property market because Morgan Stanley and Goldman Sachs will probably scale back their Japanese property investments, said Credit Suisse analyst Yoji Otani.

As they switch to commercial banks regulated by the US Federal Reserve, the two investment banks are expected to sell high-risk assets such as properties and unlock equity in real estate funds to meet capital adequacy requirements.

Mr Otani predicted falling values will be accompanied by a 5 per cent fall in average Tokyo office rents next year and a 10 per cent drop for grade-B buildings.