Rental decline in Q3 is milder than in Q2, but uncertain prospects and elevated supply will continue to put the market to test, and rents are expected to continue the downward adjustment next year, according to Savills in its Market in Minutes - Hong Kong Office Leasing report for Q3 2021.
- Grade A rents fell by 1.5% in Q3/2021 compared with a 2.6% decline in Q2/2021
- Some selective expansion demand and new leases can be seen in the Central office market among Mainland financial institutions as well as new industry tenants
- Rental declines were milder in Kowloon with vacancy gradually absorbed, particularly in Tsim Sha Tsui and Kowloon East
- In the uncertain environment, serviced offices are popular, and more take-up from large operators in core business districts are noted
- Vacancy rates continued to climb to 9.3% in Q3 with office buildings in some areas, such as North Point and Kowloon West, suffering more than others
- Upcoming supply in prime areas is seeing some early pre-commitment
- As Central's rental premium over the rest of the market narrows, decentralized rents may in turn come under pressure. Overall and Central office market rents may decline by 10% and 5% respectively in 2022.
Kowloon rents proved to be resilient
Grade A rents fell by 1.5% in Q3/2021 compared with a 2.6% decline in Q2/2021 as Kowloon rents proved more resilient than their Hong Kong Island counterparts due to the faster absorption of vacant space at discounted rates. In Q3/2021, rents in Central, Wanchai/ Causeway Bay and Island East fell by 2.2%, 2.7% and 2.8% respectively while overall Hong Kong Island rents recorded their lowest rate of decline since Q1/2020, registering a fall of 1.5%. Rents in Tsim Sha Tsui, Kowloon East and Kowloon West fell by 0.5%, 0.3% and 0.2% respectively, significantly more moderate falls than in previous quarters.
PRC demand wobbles but selective expansion remains
The local office market has seen a rising tide of Mainland demand over the last 10 years, but recent events may cool activity levels in sectors from technology to real estate, from securities firms to i-banks and asset managers, to even e-games, casinos and education. Despite the challenges, some selective expansion among Mainland financial institutions as well as some new industry tenants have been seen. Notable examples include Amber Hill and CITIC Securities' expansion in Two IFC, Haitong Securities' expansion in One IFC, and HashKey Group in Three Exchange Square as their new headquarters. In the HK$100 per square feet plus bracket, One/Two IFC and Exchange Square remain go-to developments given their landmark status and strong transport links.
Serviced offices popular
In the uncertain environment, serviced offices are again popular, and further take-up by large operators in core business districts, including The Executive Centre and Regus (under its IWG brand), are noted.
Vacancy rates stabilized
Vacancy rates stabilized at around 9.3% (5.8 million square feet) but office buildings in some areas, such as Island East and Kowloon West, suffered more than others. Island East vacancy increased by 0.7 percentage points over Q3, which was almost entirely due to increased availability outside the Taikoo Place portfolio, in particular in North Point. Kowloon West vacancy increased by 1.0 percentage points with significant increases in availability in some older buildings in Cheung Sha Wan. Tsim Sha Tsui, on the other hand, saw vacancy rates decline by 0.7 percentage points with the Gateway portfolio seeing substantial take-up over the past three months.
Office market to benefit from a strong IPO pipeline and pre-commitment deals
The strong IPO market so far this year has seen 69 new companies listed in HKEx, raising more than HK$190 billion over the first eight months. Nearly another dozen companies filed listing applications in September aiming to be listed over the rest of the year. If all these applications are successful, Hong Kong could wrestle New York for the top spot of funds raised by IPO for 2021.
The rapid rise in office completions coming on stream from 2022 onwards will test the resilience of the market if demand does not turn around quickly. The good news is that we are seeing pre-commitment deals in some prime offices in both decentralized and core areas, such as Julius Baer in Two Taikoo Place, which is due for completion in 2022, and Christie in The Henderson in Central, the latest triple Grade A office development by Henderson Land to be completed in 2023.
Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "The recent stock market tumble and strong IPO pipeline have been two balancing forces behind the Central office market. Looking ahead, narrowing rental discounts between districts, uncertain economic prospects, together with elevated supply levels may put more pressure on decentralized office rents."
Mr. Ricky Lau, Deputy Managing Director, Head of Office Leasing of Savills said: "With the uncertain economic outlook, elevated supply levels and clouded prospects for PRC demand, we expect overall and Central office market rents to decline by 10% and 5% respectively in 2022."
Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing of Savills said: "As Central's rental premium over the rest of the market narrows, decentralized rents may in turn come under pressure. Looking ahead, during a period of uncertain economic prospects and elevated supply, a lot will depend on demand from PRC firms over the next 12 to 24 months."