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Land-scarce Hong Kong is the most expensive city in the world to rent office space in high-rise buildings and demand is not expected to wane, according to property consultancy Knight Frank.
Prime rent - or rent paid to occupy a central city area - for a skyscraper office in Hong Kong's center is an estimated $255.50 per square foot per year.
In comparison, prime rent in Singapore, which is often used as a yardstick against which Hong Kong is measured, is less than half the cost at $93.25 per square foot, said Knight Frank in its "Global Cities: The 2016' report.
The typical size of a small office with amenities such as a kitchenette and meeting area is 880 square feet in Hong Kong, based on a calculation from Officespace.co.uk. The prime rent for such an office would come to a whopping $225,000 or thereabouts per annum.
Two International Financial Center, located in Hong Kong's Central District, offers Hong Kong's most expensive office rental, at about $264 per square feet annually.
Knight Frank forecasts Hong Kong's office rental growth to increase by 12 percent by the end of 2018, simply because of the lack of supply.
City prime rent per square feet on an annual basis*
"Limited office availability in the CBD, also known as Central, means it is becoming increasingly difficult to fulfill multinational companies' rising demand for business space," Pamela Tsui, senior manager of research and consultancy for Greater China at Knight Frank, wrote in the report.
The shortage of office space and sky-high rents in Hong Kong's central business district has led to a decentralization trend, Knight Frank found.
Initiatives undertaken by the Hong Kong government to take the heat out of the rental market have included plans to convert Kowloon East, which was a manufacturing zone, into a second central business district. Other policies such as land rezoning, connectivity improvement and enhanced urban design have been implemented to combat the undersupply of offices in Hong Kong.
Apart from limited supply, stratospheric office rent in Hong Kong's central business district is driven by "robust demand from corporate occupiers given Hong Kong's status as a major financial center in both Asia and globally," said Marcos Chan, head of research for Hong Kong, Macau and Taiwan at CBRE.
The convenience of business amenities including hotels, convention centers and Michelin-grade restaurants within walking distance of the central business district added to the demand for prime offices, Chan noted.
New York City was second ranked on the list of the most expensive places to rent prime high-rise office, with each square foot costing companies $153 annually, followed by Tokyo ($125/per square foot/year) and London ($122/per square foot/year).
Hong Kong offices might command the highest prime rents, but the 1.9 percent increase in rental growth in the first half of 2015 was modest compared to London's office rents, which saw a near-11 percent hike in the same period.
Prime rent in London recorded a 10.7 percent increase in rental growth in the first half of 2015, and is also the highest pace of growth across global cities. The surge in office rent is attributed to a buoyant occupier market, with vacancy rates at 14-year lows.
"Stronger growth [in London] has occurred in the areas popular with the technology and creative industries," wrote Patrick Scanlon, partner of Central London research at Knight Frank in the report.
London's Noho, formerly a garment factory district, is now the hub for leading creative firms and saw 34.8 percent increase in office rental growth from the Q3 in 2007 to the Q2 in 2015, Knight Frank said.
The report forecasts office rents to continue on an uptrend in key global cities, due to increased urbanization and higher demand driven by economic growth.
"Three of the top five global cities for office rental growth over the next three years are forecast to be in Asia Pacific, with the Indian cities of Mumbai and Bengaluru, benefitting from a strengthening economy, in second and fifth place respectively," said Nicholas Holt, head of research, Asia Pacific at Knight Frank Asia Pacific, in a press release.
In the first half of 2015, India experienced the highest percentage of foreign investments of total real estate transaction volumes, compared to other countries. The 67 percent of total real estate investments came mostly from American and Singaporean investors.
Holt added that the prospect of Indian Prime Minister Narendra Modi's real estate and land reforms provided optimism to potential investors, and that "the Indian REIT structures provide to the potential to improve funding to the real estate sector."
Malaysia and Singapore came in second and third for foreign investments share of the total real estate investments at 59 and 43 percent respectively.
"The next three years are still very much a growth story for the Asian global cities," he added.
* The Knight Frank Skyscraper Index is based on prime rents for Q4 2014 to Q2 2015, excluding exchange rate fluctuations. Currency conversions as at June 30 2015.
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