Even in today's toughmarket conditions there are still tenants taking space and lot will depend onthe return of PRC demand next year, particularly in core areas, according toSavills in its Market in Minutes - Hong Kong Office Leasing report for Q4 2021.
- Varied demand drivers in the final quarter of 2021 included crypto, art dealers and coworking operators with some (muted) mainland activity still in evidence
- Overall Grade A rents fell by 1.3% during the fourth quarter with slightly higher rates of decline noted in Island East, Island South and Wanchai/Causeway Bay
- Grade A rents fell by 5.4% over 2021 with the largest declines recorded in Island East (-8.1%), Wanchai/Causeway Bay (-7.7%) and Central (-6.5%)
- Vacant space in Q4 totals 6.0 million sq ft, much of which is concentrated in Kowloon East at 1.9 million sq ft, followed by Central and Wanchai/Causeway Bay
- Looking ahead, a wave of new supply up to 4.0 million sq ft net in total is expected over 2022, only 120,000 sq ft of which has so far been pre-committed
- A rental fall of 10% to 15% over the year in 2022 is expected as a whole, bringing the peak-to-trough rental decline to 40% by year-end 2022.
Leasing activity led by crypto, art dealers and coworking operators
Demand drivers in Q4 2021 include crypto, art dealers and coworking operators with some (muted) mainland activity still in evidence, mostly driven by SOEs. Relocations are generally being hampered by rising fit-out costs and logistical challenges – furniture from Europe can take five to six months to arrive while in mainland China, power shortages mean that factories are not operating at full capacity.
In view of cryptocurrency transactions being banned in mainland China and lightly regulated in Hong Kong, many crypto operators in this rapidly expanding sector are choosing the flexibility of co-working space. Coworking businesses themselves are benefiting from renewed interest and new sources of capital. Important leasing deals in Q4 were committed by TEC (US private equity group KKR and Singapore private equity group TIGA Investments), IWG (JV with Hysan Development) and WeWork. As WFH is still a grey area for many firms who do not yet know where the ideal office/home balance lies, taking temporary space while everyone decides seems sensible.
The art world recorded major deals inked by Philips who have taken around 40,000 sq ft in M+ and Christie's who took around 50,000 sq ft in The Henderson in Q3 this year. Such businesses intend to host their own auctions and ground floor space with removable windows is therefore desirable. As art buying takes off in Hong Kong, it will be interesting to see how actively Non-Fungible Tokens (NFT) are traded, maybe alongside crypto.
Rental decline continued to ease over 2021
Overall Grade A rents fell by 1.3% during Q4, with slightly higher rates of decline noted in Island East, Island South and Wanchai/Causeway Bay. Over the past four quarters, the quarterly rental decline has decreased from 3.5% in Q1 to 1.5% in Q3. Throughout 2021, Grade A rents fell by 5.4% with the largest declines recorded in Island East (-8.1%), Wanchai/Causeway Bay (-7.7%) and Central (-6.5%). The decline is in comparison with 16.6% over 2020.
We have analysed major rental inflection points over the past two decades and discovered that whenever vacancy rates have risen above 5% to 6%, office rents tend to start heading down, which is what occurred with the latest rental decline when vacancy surpassed the 5%-mark in early 2020. With demand remaining uncertain and substantial availability (both current and upcoming) over the next two years, office rents therefore look set to continue to head south. We currently anticipate a rental fall of 10% to 15% over the year as a whole, bringing the peak-to-trough rental decline to 40% by year-end 2022.
Current vacancy and wave of new supply weigh on rents
Vacant space in today's market totals 6.0 million sq ft, much of which is concentrated in Kowloon East at 1.9 million sq ft, followed by Central and Wanchai/Causeway Bay.
Over 2022 we are expecting a wave of new supply, 4.0 million sq ft net in total embodied by about nine new projects, but only 120,000 sq ft net of which has been pre-committed. Add to this the existing 6.0 million sq ft net of vacancy and it is clear that rents will remain under pressure.
A new business node to note is Island South, which covers both Wong Chuk Hang and Cyberport. This emerging decentralized area has become a popular choice for relocations recently, with its competitive rents (lower than Kowloon West and comparable to Kowloon East), Hong Kong Island address and convenient commute since the opening of the South Island Line in December 2016. Nevertheless, the pool of only 2.4 million sq ft net of Grade A stock in the district means relocating tenants face a limited choice. The completion of the 200,000-sq ft Landmark South next year may provide more high-quality options in this niche market.
Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "In the absence of any major demand drivers and with the supply overhang persisting into next year, rents are likely to soften further in 2022."
Mr. Ricky Lau, Deputy Managing Director, Head of Office Leasing of Savills said: "For the new projects, while a multi-floor commitment is ideal, securing a good covenant as a first commitment is important in order to benchmark rents, but also to define the tenant mix and establish a building's branding and market profile."
Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing of Savills said: "The porousness of the Mainland border, and the scale of Mainland developers in distress to return space will be two important demand variables in 2022. Many Mainland developers are based in southern China and have offices here in Hong Kong. We believe that they currently occupy around 200,000 sq ft across several business districts."