Hong Kong Office Rents Rose to Record Levels in Q4 Despite Slowdown

Despite a slowdown in the Hong Kong commercial real estate market, office rents in the Asian financial hub rose to record levels in the fourth quarter, reaching an average of HK$146 ($18.62) per square foot per month on a net effective basis in Central, according to a report released this week by Savills.

The new high-water mark for grade A office space came as rents throughout the city rose an average of 1.3 percent during the last three months of the year, compared to the previous quarter, according to the property consultancy’s research. The climb in office prices from October through the end of December brought rentals up a total of 7.8 percent in 2018, the agency said.

The upward march in the cost of securing space for desks, chairs and a water cooler comes despite signs of slowing demand from mainland corporates as an ongoing shortage of prime space squeezes tenants and brings smiles to the faces of the city’s largest landlords.

Wanchai and Causeway Bay Office Prices Rose 10% in 2019

“Rents continue to test affordability in most districts as tenants search for a dwindling number of decentralised alternatives,” Simon Smith, Senior Director of Research and Consultancy for Savills said in a statement.

The city saw office rents rise across all of its major commercial hubs during the fourth quarter, with rates in the Wanchai and Causeway Bay area rising at the fastest pace, jumping by 2.6 percent in the October through December period, compared to the previous quarter. Thanks to tenants searching for alternatives to Central’s record high rates, the Wanchai and Causeway Bay area saw the biggest jump in rents during 2018, rising 10.2 percent over the course of the year.

For the full year, office rental rates in Central were up by 9.0 percent compared to the end of 2017, and the cost of an office in the city’s traditional business hub rose by 1.6 percent during the quarter. During the last three months of the year rents on Hong Kong island in general rose by an average of 1.1 percent.

Smith noted that the price of space in Central is transforming Hong Kong’s business geography, as corporates look for less costly places to park their staff. “We are seeing new financial districts emerging because of the sustained higher rents in Central. For example, Causeway Bay is proving popular among Asian banks while Island East tends to attract the middle and back offices of multinational financial-institutions.”

Across the harbour, rents in Kowloon West, which is home to Sun Hung Kai’s prime ICC project rose by 1.1 percent, although office rents across Kowloon rose only 0.3 percent during the period.

Space Shortage Drives Prices

With the city facing a dearth of new office projects in the coming two years, Savills expects office rental rates to hold up in the new year, while predicting that growth in prices would slow due to economic conditions.

“The office leasing market is generally stable with low vacancy rates and is less likely to face a correction in 2019,” Ricky Lau, the company’s head of office leasing for Hong Kong said in a statement. “Looking ahead, grade A rents will continue to make modest gains but a protracted trade war and/or a sustained stock market sell-off could reverse that.”

During the fourth quarter the vacancy rate on Hong Kong island rose slightly but still remained at just 2.0 percent at the end of the year, according to the agency’s figures. In Central, the vacancy rate stood at 1.6 percent – equal to just 661,000 square feet (61,408 square metres) – and even in Kowloon East, which has been a centre for new developments, just 5.7 percent of grade A space was unleased, although that vacancy rate was up from 5.3 percent in the previous quarter.

Co-Working Commands a Larger Slice

Some of the space shortage may be attributable to growing take up by co-working providers and other shared space operators, the growth of which are clear from Savills figures.

The consultancy tracked 2.16 million square feet as having been leased to co-working operators in Hong Kong, with WeWork alone having leased a total of 500,000 square feet in the city, including the 100,500 square feet that the office division of The We Company leased at Nan Fung and Link REIT’s Quayside project in Kwun Tong during the third quarter of 2018.

However, Savills ventured that co-working operators are likely to lose some of that appetite for space during 2019, noting that some mainland shared space providers are already scaling back their plans in the city.

Fourth Quarter Slowdown

The record-high office costs noted by Savills came despite other agencies noting a pronounced slowdown in rental growth during the last three months of the year.

In a report released in December, JLL found that Hong Kong prime office rents increased just 0.3 percent in November – the third straight month that rental increases had slowed – after prices had risen 1.0 percent in September and 0.5 percent in October.

In November, Colliers International issued a report warning that Hong Kong, which has the world’s highest office rental rates, might see rents slide in 2019 for the first time in four years, as the city grapples with a bumpy stock market, rising interest rates and the US-China trade war.