Prominent real estate advisor Savills pointed out that the positive rental growth of Hong Kong’s Grade A office ended its seven-consecutive-quarter run abruptly in Q3 with overall rents falling by 1.0%; while the vacancy rate remained low (3.8%). All sub-markets saw a drop except Kowloon West where rents remained unchanged. On a positive note, Mainland firms remain committed to Hong Kong, even if some multinationals may be weighing up other regional alternatives. New supply over the next five years will be focused in Kowloon East and fringe island while 2023 will see major new projects completing in Central.
• Overall rents fell by 1.0%; vacancy rates remain below the 5% threshold and landlords are not yet yielding to tenant requests for rental reductions
• Mainland firms and co-working operator demand has dimmed due to uncertainties surrounding the unrest and the receding possibility of a swift resolution
• Kowloon will see significant supply during the 5 years from 2019 to 2023 while Central will chase in 2023
Prominent real estate advisor Savills pointed out that the positive rental growth of Hong Kong’s Grade A office ended its seven-consecutive-quarter run abruptly in Q3 with overall rents falling by 1.0%; while the vacancy rate remained low (3.8%). All sub-markets saw a drop except Kowloon West where rents remained unchanged. On a positive note, Mainland firms remain committed to Hong Kong, even if some multinationals may be weighing up other regional alternatives. New supply over the next five years will be focused in Kowloon East and fringe island while 2023 will see major new projects completing in Central.
The overall fall in rent ended the rising trend seen since Q3/2014 when the Shanghai-Hong Kong Stock Connect was launched. On Hong Kong Island, Wanchai / Causeway Bay was hardest hit (-1.6%), followed by Central (-1.3%, a fall for the first time since Q3/2014) and Island East (-1.1%, the first rental declines since 2014). The falls were much milder in Kowloon (Tsim Sha Tsui: - 0.8%; Kowloon East: -0.2%; Kowloon West: unchanged).
The prospects for the key demand drivers, Mainland firms and co-working operators, have dimmed suddenly over Q3 as a result of the US/China trade tensions and the social unrest.
Most PRC firms remain committed to Hong Kong and are not considering alternative locations, but caution prevails. Multinational tenants have similar business continuity concerns. Some are looking at reweighting into other cities with Singapore a clear favourite but longer flight times, high operational costs, and a lack of suitable available office stock have served to temper interest.
In the co-working environment, the failure of WeWork to list may have lowered the fundraising aspirations of other operators. Any impact from a business contraction in the sector will probably be felt most in buildings with small and medium sized floorplates of 4,000 to 6,000 sf. where co-working has traditionally flourished.
During the 5 years from 2019 to 2023, we expect new Grade A office supply to total around 9.3 m sf net (i.e. about 1.86 m sf net per annum). Kowloon East will see the most significant supply with 3.7 m sf net or 39% of the total, followed by Kowloon West (1.5 m sf net, 16%) and Island East (1.2 m sf net, 13%). Only 1 m sf net (19.3%) will be situated in Central and all of it will be completed in 2023 (e.g. The Hutchison House and Murray Road Carpark developments, Site C of the Peel Street/Graham Street project). Five-year take-up in Hong typically averages around 1.1 m sf. per annum.
Mr. Simon Smith, Senior Director, Research & Consultancy commented: “Many businesses have been hard hit by the trade tensions and the recent social unrest but with vacancy below 5% rents remain relatively firm. If current conditions persist into next year, however, rents will see much heavier declines. With new supply in Central not expected to complete until 2023, rents in the district will be reasonably well supported.”
Mr. Ricky Lau, Deputy Managing Director & Head of Office Leasing said: “Burn rates in the co-working industry are high and survivability may become a challenge in this environment. Facing lease expiry next year, most tenants are now prepared to wait before entering negotiations. Looking more positively at the market for flexible space, current uncertainties and hazy prospects for a swift resolution may boost demand from tenants unwilling to commit to one- or two-year leases.”