Office Rents Decline Further By 1.9% QoQ As Mainland Office Demand Slows

• Hong Kong Grade A office rents continued to decline by 1.9% in Q2/2022 while vacancy remained stable
• The gradual containment of the fifth wave saw more people returning to their workplaces, and the loosening of various social distancing measures also helped revive sentiment in general
• Mainland office demand was undermined by stock market turbulence anda quickened pace of interest rates hike in the US which caused IPO and secondary listings volumes to crumble in H1/2022; it was also a first half to forget for cryptos and new economy companies, which have seen heavy declines in value
• On a brighter note, medical groups have been expanding in fringe Central with increasing healthcare demand as well as the lower rents on offer 
• While rents are expected to decline further over the second half, older stock will face particularly strong headwinds from more modern new supply, greater ESG regulation and changing expectations of the workplace.

Overall Grade A rents down by 1.9% quarter-on-quarter

The gradual containment of the fifth wave saw more people, including decision makers, returning to their workplaces. More renewals and relocations have therefore taken places in Q2, with vacancy remaining more or less unchanged over the past three months, standing at 9.9% in June compared with 9.8% in March.

Nevertheless, stock market turbulence as well as sharp rises in interest rates in the US caused IPO and secondary listings volumes to crumble in H1, negatively impacting Mainland leasing demand especially in core areas. Meanwhile, cryptos and new economy companies, which have supported the office market over the past three to six months, suffered from heavy value declines in H1, while some of the more vulnerable cryptos disappeared altogether in the recent downturn. As such, the sector's demand for offices dwindled, and facing a raft of other external uncertainties, office rents continued to decline by 1.9% in Q2.

A mixed picture for new office take-up

Take-up of new office supply has been slow but with some projects achieving close to 50% pre-commitment: the three office towers at 11 SKIES at the airport (around 550,000 sq ft), were reported to have half of the space pre-committed; meanwhile, CITIC Bank leased around 130,000 sq ft in Two Taikoo Place, bringing its pre-commitment rate to around 25%.

Also noteworthy was that medical groups have been expanding in fringe Central and other core business districts to cater for increasing healthcare demand and take advantage of the lower rents on offer.

However, other offices with an expected completion this year amounting to around 2.9 million sq ft have not seen significant take-up to date. With many of them facing completion delays of at least six to nine months, we expect vacancy to start picking up again towards the end of this year / early next.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Crypto and new economy demand was hard hit by recent heavy value declines, while healthcare and medical groups took up the slack. Take-up of new office supply has been slow, and we expect vacancy to start picking up again towards the end of the year."

Mr. Ricky Lau, Deputy Managing Director, Head of Office Leasing of Savills said: "Even though Mainland office demand has slowed over H1, we expect the loosening of the quarantine requirement from 14 days to 7 days will inevitably increase flows of capital and people between Hong Kong SAR and Mainland China, while other rumoured measures, such as allowing RMB settlement for Stock Connect programmes could help revive stock market volumes."

Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing of Savills said: "While rents are expected to decline further over H2, older stock will face stronger headwinds from more modern new supply, greater ESG regulation (including green certification) and changing workplace demands which place a greater emphasis on, for example, health and wellbeing and better amenities."