Under the influence of the credit crisis playing out overseas which led to a cautious approach in cost control by companies, the grade A office market in Q3 2008 witnessed a slower movement and less take-up in most business districts compared with the last quarter. Central's average monthly net effective rents remained unchanged at HK$122 per sq ft, while the vacancy rate rose slightly to 1.2% from its record low figure of 1.1% in the last quarter. The recent credit crisis is yet to have its full impact on Central's rental in Q3, but not since Q2 2003 was negative take-up witnessed in Sheung Wan, Central/Admiralty and Wanchai/Causeway Bay. As more office space was being released in the market than being occupied, it signifies a shrunk demand for premium office space from the traditional finance and business-related sectors, and part of the demand has shifted to non-financial sectors during Q3, according to international property adviser DTZ.

"The volatile market development overseas is having an impact on the local economy, especially on the FIRE sector (finance, insurance, real estate and other professional services) which has been the pillar of the grade A office space in core business areas of Hong Kong,"said Mr Alva To, DTZ's Head of Consultancy, North Asia. He noted that more than 84% of tenants in Central's grade A offices belong to the FIRE sector which is more susceptible to the negative consequences of the credit crisis. These companies have thus taken a more cautious approach in their business running and adopted a tighter control on cost, and the effects could be seen in the reduced take-up in major districts.

In Q3 2008, the overall grade A office take-up in Hong Kong Island amounted to 14,681 sq ft, which lagged behind last quarter's take-up figure of 1,580,890 sq ft. Take-up for all districts of Hong Kong Island dropped but to various extents. Mr To said, "In Central and Admiralty area where supply of grade A office has traditionally been scarce, take-up fell from 13,851 sq ft in Q2 to -13,387 sq ft in Q3, which was milder than in the neighbouring district of Sheung Wan where the take-up figure dropped from 8,914 sq ft in Q2 to -33,219 sq ft in Q3."

Benefited from the relocation of companies fleeing from the high rental and tight availability of office space in Central/Admiralty, Wanchai/Causeway Bay recorded the biggest take-up in Q2 at 166,647 sq ft. However the area suffered from a negative take-up of -21,760 sq ft in Q3. "In the current volatile climate, companies have been more cautious in choosing Wanchai/Causeway Bay as a relocation option, because rental of that area had followed the upward trend as that of Central/Admiralty though to a lesser extent. Cost control is considered as a reason why companies, some from the FIRE sector in particular which have been more affected by the credit crisis, were shy from the Wanchai/Causeway Bay area,"commented Mr To.

Tsimshatsui stood to benefit from companies in search of quality office space with a lower rent than that of Central/Admiralty and Wanchai/Causeway Bay. It became the only district that recorded increased take-up in Q3, rising 421% from 7,930 sq ft in Q2 to 41,295 sq ft this quarter. The increase in percentage was even greater than the 380.3% recorded in the last quarter. Mr To said, "The take-up figure of Tsimshatsui in this quarter can be partly explained by a shift of interest towards this district at the tip of the Kowloon Peninsula. Its short distance from Central/Admiralty and developed office market make it a favourable destination for CBD companies deciding to relocate to cheaper yet developed office space to suit their business needs. Non-FIRE sector companies, such as those in the manufacturing and shipping industries, also took up office space in Tsimshatsui for expansion purpose and for a higher rental saving.

Elsewhere in Kowloon, Kowloon East with the biggest new supply of office space this year also witnessed the biggest take-up figure of all districts in this quarter which stood at 223,380 sq ft, though it still represents a drop of about 7% from Q2's 241,186 sq ft. Mr To commented, "The positive figure indicates a constant demand for business space in Kowloon East, especially from non-FIRE sector companies which have been attracted to the newly developed office space there where the rental remained at a competitive level."

The combined take-up figure of the Hong Kong office market in Q3 stood at 279,356 sq ft, down from 1,830,006 sq ft in Q2. Market activities have been subdued during this quarter as demand for office space persisted especially in the traditionally non-core business areas. Mr To observed that, although negative take-up records were found for most districts in Hong Kong Island, none has surpassed -50,000 sq ft, and after averaging out the figures were not judged as a significant impact to the overall market at the present moment.

Turning to vacancy, due to mostly negative take-up, all districts in Hong Kong Island saw their vacancy rate increased except for Island East. Central maintained the lowest vacancy rate in Hong Kong Island at 1.2%, which was slightly up from last quarter's record low level of 1.1%. Sheung Wan recorded the biggest increase in vacancy rate, up 1 percentage point quarterly from 3.6% to 4.6%. Wanchai and Causeway Bay's vacancy rate was also up from 2.3% in Q2 to 2.4% in Q3. On the other hand, Island East's vacancy rate dropped from 2.8% in Q2 to 2% in Q3, if One Island East is taken into account. New supply of quality office space like that in One Island East attracted companies' attention and was more readily taken up then in other districts. When taking all districts into account, the overall vacancy rate of Hong Kong Island was the same as Q2 which was 1.9%.

On Kowloon's side, Tsimshatsui saw its vacancy rate dropped from 3.4% to 3% this quarter, again proving the popularity Tsimshatsui has gained among companies in need of relocation. Kowloon East's vacancy rate however jumped quarterly from 14.8% to 26.8% in Q3, as new supply such as Kwun Tong 223, Landmark East and Manhattan Place have come on stream during Q2 and Q3. Meanwhile the vacancy rate of Kowloon West (Kowloon Station) remained unchanged. Mr Mark Price, DTZ's Head of Business Space, North Asia, commented, "The volatile financial market development around the globe is starting to have some impact on the Hong Kong office market vacancy rate, especially on the Hong Kong Island where companies of the FIRE sector concentrate. However, most districts saw a change in vacancy rate of no more than 0.5 percentage points, except Wanchai/Causeway Bay and Kowloon East. This means that vacancy of office market was more or less stable compared with the last quarter, and compared with a year ago the figures of Q3 2008 are on average about half of those of Q3 2007, suggesting the availability of office space in all the major business areas in Hong Kong is still tight."

Although the take-up and vacancy rate of the local office market were affected by the prevailing cautious sentiment, rental was less hit than expected during Q3. Most districts saw no change or minor change of 1-2% in rental level, except for Kowloon East with ample supply of office space which saw a bigger fall. Of all districts, Central/Admiralty remained the best performer with the monthly net effective rent stood at HK$122 per sq ft, which was the same as last quarter. Island East also saw no change in rental, thus the rental gap between Central/Admiralty and Island East stayed the same at a distance of HK$91 per sq ft per month this quarter. No change in rental for Wanchai/Causeway Bay too which saw its rental level stayed at HK$45 per sq ft per month. Beating against the general trend, Sheung Wan edged up 2% to HK$53 per sq ft per month. On Kowloon's side, there was no change in Tsimshatsui's monthly rental level from the last quarter which remained at HK$32 per sq ft. Kowloon East's net effective rent fell quarterly by 11.5% from HK$26 to HK$23 per sq ft per month. Mr Price said, "The credit crunch entered a critical phase at the end of Q3 2008, and its full impact is yet to be reflected in the general Q3 rental level of all districts. Thus apart from a worsening external trade environment, demand played a more important role in determining the rental level of these districts. For Central/Admiralty area, landlords could still count on the tight availability of prime office space and gave less way in rental negotiation, although the credit crisis was clearly beginning to affect the sentiment of the market and many companies became more careful in cost control and business expansion. This has led to a stable development of rental in Central/Admiralty. On the other hand, in Kowloon East where new supply of office space is ample, landlords had to be more flexible in price negotiation in order to secure tenants, and this has increased the pressure for a downward movement of rental for that district."

Amid an abundance of new supply and a cheaper rental level, Mr Andy Yuen, DTZ's Director of Office Agency, pointed out that several major office leasing deals were observed in Kowloon East during Q3. "New supply such as Landmark East and Manhattan Place is giving tenants more choices in relocation destination. Landlords thus have to keep their rents competitive to attract tenants. As the FIRE sector has become more cautious in running their business, non-FIRE sector in turn underpinned the demand for office space and Kowloon East was seen as a good option to them, as these companies have been searching for cheaper office space that suited their business needs."

"Even as vacancy rate slightly rose and rental trend became flat in Q3, Central/Admiralty is still characterised with a prestigious location and a limited supply of office space. That will give landlords some edge during lease negotiation which may result in a stable rental for the CBD in the short-term. However as Central/Admiralty relies heavily on the FIRE sector, the performance of the local and global financial markets can bring major changes to the CBD scene. Against this backdrop, we expect the impact of the volatile economic development overseas will play out more in the next quarter and into next year, during which time companies will be more vigilant and careful in their operations, and any consolidation, relocation or leasing plan will be scrutinised against the current economic situation to see whether it is the best for the development of the company. The decision making is bound to have an effect on the local office market,"concluded Mr To.

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For further information contact:

Alva To

Head of Consultancy, North Asia

Email: alva.yh.to@dtz.com.hk

Direct Tel: +852 2507 0550

Direct Fax: +852 2869 7372

Mark Price

Head of Business Space, North Asia

Email: mark.jl.price@dtz.com.hk

Direct Tel: +852 2507 0706

Direct Fax: +852 2736 6510

Stephanie Liu

Corporate Affairs Director, North Asia

Email: stephanie.oy.liu@dtz.com.hk

Direct Tel: +852 2507 0637

Direct Fax: +852 2530 1441

Andy Yuen

Director of Office Agency

Email: andy.cy.yuen@dtz.com.hk

Direct Tel: +852 2507 0722

Direct Fax: +852 2530 1412

Notes to Editors

DTZ is a leading global real estate adviser with more than 12,500 staff operating under the DTZ brand across 150 cities in 45 countries providing solutions for clients around the world. Its client-focused activities range from high quality capital market solutions, to cutting-edge occupier-led property services and advice. The comprehensive service offering across Europe, the Middle East and Africa (EMEA), Asia Pacific and a growing presence in the Americas is based upon detailed local knowledge backed by first-class research. With its full-service expertise spanning all real estate sectors, DTZ offers a global solution to meet each client's particular property-related investment and business needs. The parent company, DTZ Holdings plc, has been quoted on the London Stock Exchange since 1987.

DTZ

www.dtz.com/cn