Despite hopes for a recovery after this year’s pandemic-induced meltdown, property consultancies have issued cautious forecasts for Hong Kong in the new year, with office leasing in particular braced for a further decline after a battering in 2020.
This year saw office rents in upmarket Central fall to their lowest since 2015, while tenant withdrawals in the city overall reached the highest level on record, according to a recent JLL analysis.
New lettings in Central fell about 39 percent compared with 2019 levels. The vacancy rate in the overall office market rose to 8.8 percent, the highest level since 2004, and the amount of leased space relinquished prematurely reached 1.6 million square feet (148,645 square metres), a high since 2001.
Squinting for the Silver Lining
“Despite subdued leasing demand in the near term, gross leasing volume is expected to pick up in 2021 as tenants start making longer-term real estate decisions,” said Alex Barnes, head of markets at JLL in Hong Kong. “The vacancy rates will continue to rise in 2021, albeit at a slower pace. The rental fall would be less significant next year compared with 2020.”
JLL expects rents to drop in a range of 5 to 10 percent in 2021 across all office submarkets — except for Tsim Sha Tsui, where leasing rates are seen falling 10 to 15 percent in the southern Kowloon area’s aging buildings as district faces growing competition from emerging business locations in the city.
The rental decline in traditional business districts has been steeper than in decentralised locations as more tenants seek cost-effective options, JLL said.
In Central, office rents this year fell an estimated 22.7 percent to an average of HK$93.80 ($12.10) per square foot, the sharpest drop among submarkets. Rents in the hard-hit financial district are now down 28 percent from their peak in the second quarter of 2019.
Up and coming Kowloon East, which thanks to newer buildings and lower rates than Central has attracted tenant titans like JP Morgan in recent years, took less of a hit but still saw rents fall 10.5 percent this year, JLL said.
Still, the steep correction in rents could give bargain-hunting firms the push they need to consider taking up more space in Hong Kong.
“Lower rents can increase the city’s competitiveness, potentially positioning Hong Kong as a more attractive location to conduct business,” Barnes said. “The secondary listings of PRC firms in Hong Kong and GBA Wealth Management Connect would attract more mainland financial institutions and related industries to set up offices in the city, which could help support office demand in the medium term.”
Sentiment Vaccine Needed
Cushman & Wakefield also sought to temper 2021 expectations in its Hong Kong forecasts released last week. The agency said that while the full-year outlook remains gloomy, the availability of a COVID-19 vaccine by mid-year should support the beginnings of an office demand recovery.
Cushman estimates that the amount of office space under lease in Hong Kong fell by 2 million square feet during 2020, roughly in line with JLL’s findings. Overall vacancy in the fourth quarter climbed to 12.1 percent, the highest level since the first quarter of 2005. That degree of empty offices climbed into double digits across Hong Kong’s major commercial hubs during the quarter, with the exception of Hong Kong East, where lower rents and new projects such as Swire Properties’ One Taikoo Place have helped to draw multinational tenants.
“Net absorption is forecast to remain in negative territory, ranging from -650,000 to -700,000 square feet, as demand is set to remain weak in 2021,” said John Siu, managing director of Cushman & Wakefield Hong Kong. “Despite the limited new supply scheduled for 2021, the 4.2 million square feet in new supply from nine projects planned in 2022 is expected to continue to weigh on rentals.”
While Hong Kong East proved more resilient than other Hong Kong business hubs, the area around Taikoo and Quarry Bay still saw office rents slide by 12.7 percent so far this year, according to Cushman’s analysis. Rents across the city were down an estimated average of 18.7 percent, near the midpoint of the agency’s previous forecast range in October.
“Office rents will continue their downward trajectory as demand remains weak and availability rises,” said Keith Hemshall, Cushman’s head of office services for Hong Kong. “Large occupiers with leases expiring in 2022-23 will seek to leverage against over 4 million square feet of new Grade A supply completing in 2022.”
Small occupiers will continue to consider serviced offices as an option to maintain flexibility and avoid upfront expense, Hemshall said.
Limited Tax-Cut Boost
With rents being pushed down, capital values in the Hong Kong’s Grade A office market fell by an average of 20.5 percent in 2020.
That slide in commercial property values came as tension between buyers and sellers over the market outlook dragged on market turnover, with total investment volume for commercial properties worth over HK$20 million tumbling 27 percent this year to HK$54.2 billion, the lowest level since the global financial crisis, JLL said.
The agency sees the office investment market dropping a further 10 to 15 percent by value in 2021, despite recent moves by the government to remove barriers to transactions.
“The abolition of the double stamp duty on non-residential property transactions is expected to provide a fresh impetus to investment activity, especially for stratified assets with relatively small consideration,” said JLL Hong Kong chairman Joseph Tsang. “But this would likely have limited impact on en bloc transactions as most of them are conducted via company share transfers.”
Sam says
25-35% reductions should be sought by all tenants. If not then your agent isn’t doing his or her job.