HONG KONG -- Hong Kong is still the world's most expensive city in which to rent offices in its skyscrapers and will remain so in the next three to five years, according to property consultant Knight Frank on Thursday.
Annual office rent in Hong Kong reached $278.5 per square foot in the second quarter, far ahead of New York's $158 and Tokyo's $149.5 per square foot. London ranked fourth with an average rent of $114 per square foot, according to Knight Frank's latest Skyscraper Index, a survey of 31 cities around the world.
Shanghai, which ranked ninth in the survey, recorded the world's highest office rental growth at 7.6% in the first six months year-on-year, followed by Sydney at 6.6% and Hong Kong at 5.9%. Singapore was one of the underperformers with a rental fall of 7%, owing to abundant new office supply and a slowing local economy.
"I'm not sure if the rankings are a blessing or woe for Hong Kong... But I don't expect other cities to easily catch up soon," said Knight Frank's senior director Thomas Lam, who predicted the territory's prime office rents to grow 2-5% next year.
Underpinning Hong Kong's robust office rental market is both a strong demand and a lack of supply of Grade-A offices.
Its central business district is the smallest among its peers, with Singapore's about 1.5 times its size. New York's Manhattan is nine times bigger than Hong Kong's CBD, which mainly comprises Central and Tsim Sha Tsui. By 2020, Hong Kong is likely to face an office space shortage of 2 million square feet, equivalent to an 88-storey skyscraper.
To alleviate the problem, the local government is building new office clusters. The most prominent one is known as CBD2 in Kowloon East, which will provide back-office space for occupiers across the harbor. Knight Frank said office rents in Kowloon East were much lower than in Central now, although it estimated that Grade-A office supply there would surpass Central's by around 2020.
The expansion of mainland Chinese companies into Hong Kong has been pushing office prices and rents higher. Mainlanders account for half of all office transactions as some of them see the Hong Kong as a springboard to global markets for investment opportunities.
In July, Shenzhen conglomerate Cheung Kei Group splashed 4.5 billion Hong Kong dollars ($580 million) on the east tower of Wheelock's One Harbour Gate, just months after China's largest insurer China Life Insurance snapped up the west tower of the same office complex in the Kowloon district for HK$5.85 billion.
There were 44 investment deals worth more than HK$100 million each in Hong Kong's property market in the third quarter so far, with over half of the transactions in luxury residential and office, according to property consultancy DTZ/Cushman & Wakefield.
Foreign interest is growing especially after the U.K.'s vote to leave the European Union in late June. While local investors still dominate the market, DTZ estimated that foreign buyers, excluding mainland Chinese, accounted for 8% of transactions including an en-bloc office sale during the quarter, up from none in the second quarter.
"Much of the foreign capital has been from Europe as investors are looking for safe assets in the dollar zone including Hong Kong after Brexit," said Kenneth Yip, DTZ's Director of Investment and Advisory Services in Hong Kong, on Wednesday.
Yip expects the number of major deals to reach 60 in the third quarter and a similar level in the next quarter, helped by stronger mainland and foreign demand for office space. "It's not surprising that we will see some more multibillion deals in the fourth quarter," he added.