HK Land now the most competitive landlord in Central: Savills

But there's a scarry trade-off.

Nomura said it recently held an investor luncheon with Savills, one of the leading real estate service providers, to discuss Hong Kong’s office market outlook. Overall, the message was positive. Savills expects Central office rents to bottom out around mid-2013 and rise 6% for the full year. In the overall market, rents are expected to rise 10%. In the longer term, the outlook is also positive as supply remains significantly below trend while a pick-up in IPO activity may help to spur demand.

One of the key take-away of the discussion, Nomura said, is that HK Land now the most competitive landlord in Central . "With CK Center securing the Bank of America lease, HK Land is now the most competitive landlord in Central with rents in the 90s."

As landlords now trade rents for occupancy, Nomura notes that the good news is that demand has responded somewhat but the trade-off it warns is that rental reversions are likely to be flat compared to three years ago. "While the lower rents have helped to unlock take-up, the problem has not entirely gone away." 

Savills estimates the amount of space to be surrendered in 2013 at around 2.3% of Central office stock and, if added to the current 4.4% vacancy, this could push effective vacancy up to 6.7%.

Here are other interesting takeaways from the discussion :

 Central landlords now more accommodative and demand has responded – Compared to discussions from six months ago, Central landlords appear to have become more accommodative. In addition to their willingness to accept lower rents, some landlords are also now willing to accommodate longer lease terms and caps on face rents as they try to address tenants’ concern on long term affordability issues.

 Decentralised offices – The accidental speculator – As Central landlords become more realistic, this also means decentralised landlords with space to fill have also had to be more accommodative on rents and their target tenants. For Kowloon East, one interesting dynamic for 2013 could be the end-user-turned-speculator dynamic. Over the past two years, much of the strata-title space was bought by end-users looking to lock in their accommodation costs. But with capital values having risen significantly, some end-users may now look to lock-in their capital gains. As a result, they may come back in the rental market to look for space in a market that is already facing very tight vacancy of only 1.6%.