Ironically, and on the supply side, a limited supply of new office space in Hong Kong is, instead of boosting rents, prompting some potential and existing clients to seek more available and cheaper office space in Kowloon, where the average rent is 58% lower than on Hong Kong Island.

"Several large occupiers will exit buildings in some districts on Hong Kong Island during 2010, and coupled with an increase of whole floors and pockets of space being returned to the market, we will see continued pressure on rental (price and transaction) levels for the next 12 to 15 months," said CB Richard Ellis's executive director of office services Rhodri James yesterday.

Despite the short-term sluggish outlook on office rentals, office transactions have returned to a reasonable, although not fully robust, level after the global financial crisis in September 2008.

After an unprecedented pace of rental decline of 38% on Hong Kong Island in the aftermath of the financial crisis in September last year, the firm believes office rents in Grade A buildings on Hong Kong Island face a positive future in the medium to long-term.

Richard Ellis believes limited new supply on Hong Kong Island will eventually generate a recovery in rental and occupancy levels, presumably as broad demand in a recovering economy increases, while also paving the way for Kowloon office space as an alternative option for companies looking to secure large continuous space options in highly specified Grade A buildings.

Despite the weakened general trend, there are pockets of good news and brisk activity on Hong Kong Island. "Transaction velocity has been solid, particularly in Central, and we have seen considerable activity in the legal and financial sectors, resulting in better than expected absorption rates," James said.

He added that financial companies have been committed to rent grade A offices in Central including One and Two IFC, Chater House and Cheung Kong Center, while the Landmark has also secured a number of leases from several law firms.

CB Richard Ellis noted that a two-tier market is forming on Hong Kong Island. While the supply for medium to large occupiers above 30,000 square feet remains tight, another tier of smaller office space has a supply that is becoming more plentiful.

John Davies, CB Richard Ellis's senior director of Kowloon office services, said the continual infrastructure improvements in West and East Kowloon will encourage more corporations to move their bases over to Kowloon.

"Some corporations will always look to maintain their front office in Central, while leasing larger mid or back offices in Kowloon," Davies said.

Investment banks Morgan Stanley, Deutsche Bank and Credit Suisse have announced they intend to be the major tenants in International Commerce Center in West Kowloon, while Manulife, AXA General, adidas and Wachovia Bank will also move their operations to Kowloon.

Benedict Ma, associate director of CB Richard Ellis research in Greater China, said rental levels in Kowloon may have already bottomed out, while he expects the office rents to rise 5 to 8 percent in the first half of 2010.

"The demand for offices may increase in the second half of next year, as the local economic conditions gradually improve," Ma added.

Source: China Daily