Hong Kong Office Rents Down 2% in Q1 as Banks Cut Back on Space

Cryptocurrency has begun to show its real-world utility as demand for office space from start-ups dealing in bitcoin, NFT and blockchain is helping to offset downsizing from multinational banks and other traditional occupiers in Hong Kong, according to Savills research.

Despite experiencing a quarter when measures to control the city’s fifth wave of the COVID-19 pandemic, stock market turbulence, the Russian invasion of Ukraine and the lockdown of major mainland cities made the city noticeably quiet in terms of transaction volume, average Grade A office rents slid just 2 percent compared with the final three months of 2021, the agency’s analysts said.

Monthly rents in the quarter averaged HK$55 (about $7) per square foot, down 27.2 percent from their peak in the second quarter of 2019, Savills said in its Hong Kong Office Leasing report, with the firm predicting an extended period of challenges for owners of older buildings.

“A total of 17.2 million square feet (1.6 million square metres) net of available Grade A office space over the next four years may mean a long road to recovery for the office sector with tenant preferences shifting towards contemporary builds and green certified space,” said Simon Smith, regional head of research and consultancy for Asia Pacific at Savills.

Upgrade Opportunities

The agency noted that multinational banks in Hong Kong have downsized their offices by at least 312,000 square feet since the second half of 2020, including a 104,000 square foot give-back by Deutsche Bank at the ICC and Standard Chartered Bank giving up 65,000 square feet at its headquarters in the Standard Chartered Building in Central. Also minimising were Japan’s Nomura, which gave up 56,000 square feet at Two IFC, and UBS, which handed back 33,000 square feet across its Two IFC and Li Po Chun Chambers locations.

“Considering the impact of (work from home) and the reduction in office space take-up, Grade A office rents are likely to continue to drift down over the near term,” said Ricky Lau, deputy managing director and head of office leasing at Savills Hong Kong.

While the retreat of the major banks has created openings for upstarts in the fintech sector, these smaller firms are most often finding space in newer buildings with higher levels of vacancy, including new leases signed at properties like H Code and The Wellington in Central during the period.

Also finding new tenants during the first quarter were The Chelsea and 33 Des Voeux Road West in Sheung Wan and Tower 535 in Causeway Bay.

Hong Kong’s existing vacancy of 6.2 million square feet and a pipeline of new supply totalling 11 million square feet from 2022 to 2025 will offer plenty of upgrade opportunities in the years ahead, Savills said. At the same time, the trend towards green-certified buildings will pose a challenge to owners of older properties who have not kept the assets up to date.

Staying Positive

In its own first-quarter report, Cushman & Wakefield said Hong Kong’s office rents stayed stable in January before leasing activities substantially slowed as the COVID situation worsened in February.

In Greater Central, which includes all of Central, Admiralty and Sheung Wan, monthly rents in the first three months of the year averaged HK$97.80 per square foot, down 0.5 percent from both the prior quarter and the year-earlier period, Cushman said.

Rents in Prime Central, defined as 12 key office buildings in Greater Central, averaged $113.70, down 0.8 percent from the last quarter of 2021 and 1.3 percent from the first quarter of 2021. Only Hong Kong East and Hong Kong South showed notable drops in rental levels, down 2.2 and 1.5 percent respectively.

The city recorded positive net absorption over three consecutive quarters as of the first quarter of 2022, amounting to 245,100 square feet, with the banking and finance sector accounting for the lion’s share of new leasing transactions in the first quarter with 34.7 percent, followed by consumer products and manufacturing at 12.8 percent.

“We estimate a total net absorption of 300,000 to 500,000 square feet in 2022, with the banking and finance sector leading demand for office space, while the professional services and logistics sectors will also remain active,” said John Siu, managing director and head of project and occupier services for Hong Kong at Cushman & Wakefield.