The Hong Kong office market is grappling with the dual challenges of oversupply and weak demand. Weakness in the financial sector and rising relocation costs were key factors contributing to the subdued demand observed,according to Savills in its Market in Minutes – Hong Kong Office Leasing report for February 2024.
- IPO market saw a significant decline, with a 55% year-on-year decrease in funds raised, marking financial companies reluctant to expand.
- Grade A office vacancy rates rose across most sub-districts, with Kowloon West witnessing a surge from 8.0% to 33.5% due to new office projects completion.
- Overall vacancy rate reached 14.7% in Q4 2023, with a total of 10.3 million sq. ft. of net vacant space.
- Grade A office rents declined by 1.7% in Q4 2023, leading to a total adjustment of -7.5% for the entire year.
- Rising capital expenditure associated with relocations poses challenges for businesses considering cost-saving moves.
- Office rent forecast for 2024 predicts a decline of 5 to 10%.
Stock Decline and Mixed Performance for Finance and Insurance Companies
The Hang Seng Index experienced a decline of 4%, resulting in a cumulative drop of 14% for the entire year. The Hong Kong stock market capitalization also contracted by 13%, reaching HK$31 trillion. The IPO market saw a significant decrease, with a year-on-year decline of 55% in funds raised, marking its worst performance since 2001. Consequently, finance companies were reluctant to expand, except hedge funds and quantitative traders who were able to generate profits even in a bearish market.
In contrast, insurance companies initially benefited from increased Mainland business following the reopening of borders and exhibited aggressive expansion in the first half of 2023. However, premiums derived from Mainland visitors declined in the second half of the year. Despite this decline, the full-year figure remained 36% higher than in 2019.
Rising Vacancies and Declining Office Rents
The Grade A office market experienced a rise in vacancy rates across most sub-districts in Q4 2023. Notably, Kowloon West witnessed a significant increase in vacancy rates, surging from 8% to 33.5% due to the completion of new office projects. The overall vacancy rate reached 14.7% in Q4 2023, with a total of 10.3 million sq. ft. of net vacant space. Additionally, Grade A office rents declined by 1.7% in the same quarter, resulting in a total adjustment of -7.5% for the entire year.
Rising Relocation Costs Makes Businesses Reluctant to Move
Businesses considering relocations faced challenges due to escalating capital expenditure associated with such moves. Fit-out and reinstatement expenses alone could reach substantial amounts, ranging from HK$1,500 to HK$2,000 per sq. ft. This presented significant financial burdens for businesses seeking cost-saving relocations.
Potential Scenarios for Hong Kong Office Market
Looking ahead, the demand recovery speed remains uncertain. In an optimistic scenario, gradual occupancy by Mainland corporates and emerging sectors could resemble the period between 2011 and 2019, with an average annual take-up of 1.3 million sq. ft. net. However, even in this scenario, office vacancy rates are projected to reach 17% by the end of 2027. Conversely, if demand follows a more volatile trajectory, office vacancy rates may surpass the 20% threshold by 2027, resembling the average annual take-up of 0.5 million sq. ft. net observed from 2018 to 2022.
Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “Weak demand in the market during Q4 2023 was driven by underperforming financial sector, while newly completed offices struggled to achieve full occupancy due to rising relocation costs.”
Mr. Ricky Lau, Managing Director, Head of Leasing of Savills said, “The current net office vacancy stands at 10.3 million sq. ft, with an additional supply of 8 million sq. ft. projected between 2024 and 2027. These factors contribute to downward pressure on rental rates. Therefore, we expect a decline of 5 to 10% in office rent in 2024.”
Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing of Savills said, “While all new offices in 2023 were completed towards the end of the year thereby with little time to be taken up, the slower-than-expected take-up rates of the ‘new’ completions in 2022, of which only around 43% of the 3.2 million sq f.t. net lettable space were taken up so far.”