Hong Kong serviced office market booms as traditional leasing fails

Hong Kong’s commercial property market is undergoing a marked change in consumer focus, with the latest figure suggesting that serviced office demand has grown exponentially as traditional leases plummet.

The shift away from grade-A office stock is an indicator of entrepreneurship overtaking traditional business models as a result of economic turbulence, with the financial and banking sectors taking the lead in embracing the serviced office model for its flexibility and dearth of up-front capital investment.

Paul Salnikow, chairman and chief executive officer of The Executive Centre, a provider of serviced office space in Asia with 50 centres in 18 cities across Hong Kong and China, believes the trend can be traced back to staff reductions and pay freezes seen in 2011 and 2012.

He said: “The wave is currently on-going, having begun about a year ago. The trend can be defined as bankers and financial services people leaving the big banks and becoming entrepreneurial by opening their own firms".

The banking sector was responsible for 51% of The Executive Centre’s occupied space in Hong Kong as of January 2013, up from 29.5% in the same period in 2010, according to the latest figures. 102 individuals associated with the banking sector initiated tenancy with The Executive Centre in 2012 alone.

Salnikow said: "This trend is clearly set to continue, as big banks downsize but individual bankers refuse to leave the market. I recently got two calls from former bankers at Morgan Stanley and Credit Suisse".

Having seen entire departments streamlined or removed altogether, Salnikow believes banking staff have begun setting up their old divisions in serviced offices as independent ventures, using long-established business relationships to attract former clients to jump ship.

"The average size of the group that is coming across is six persons, and the groups are almost always former banking teams who are transferring over into Executive Centre space en masse."

And, despite their recent boom in popularity, Salnikow has no plans to capitalise on the situation by raising rents, as cost-effectiveness is a key market driver and is already behind a marked increase in profits.

He said: “We generally align our rates with the grade-A office market trends, so for 2013 we expect the rates that we charge to remain flat. Demand for our product is very high, with occupancy rates at or near 100 per cent, but we still need to be mindful of general market conditions."

The Executive Centre’s six Hong Kong offices are predominantly located in Central and Admiralty, and include iconic addresses such as Two Exchange Square, Wheelock House, Three Pacific Place and the Nexxus Building.

Rival business centre provider Regus currently boasts 13 offices across Hong Kong, with two more scheduled to open within the coming two months. A spokesperson said: “Whether we open more new business centres later in the year will depend on market demand".

In contrast, the traditional commercial office market has taken a significant hit as a result of current economic woes, with financial industries losing substantial cash and staff assets as a result of fines, defaults and re-structuring.

Denis Ma On-ping, director of Greater Pearl River Delta research at Jones Lang LaSalle, said: “We have seen some new set-ups by mainland companies and funds. But they are not looking for large office spaces. Units offering 10,000 square foot of space are already big for them. There is a lack of demand for large office space".

A continuous downward trend is anticipated for the first two quarters of 2013, "But we are optimistic for the second half, as we will then begin to see the impact of measures taken by countries to stimulate their economies", Ma said.

Similarly, a number of significant leasing deals, renewals and new leases on smaller properties led Thomas Lam, head of research and consultancy of Greater China at Knight Frank, to declare that: "While leasing demand needs more time to recover, we believe the downward pressure on Central rents will ease in 2013, after they fell 14.6 per cent in 2012".

This sense of optimism, coupled with encouraging take-up rates in later 2012, has led most analysts to predict that the current fall in demand would result in a rental price fall of less than 5% in 2013.