Grade A office rents in Hong Kong’s traditional business district experienced their largest quarterly drop in seven years according to a newly released report, as a slowing mainland China economy and ongoing protests dampened demand in the world’s priciest commercial market.
Rents in the Greater Central Area, which includes the Asian financial hub’s Central and Admiralty districts, together with the Sheung Wan area at the western edge of Central, fell by 3.2 percent during the three months ending 30 September, according to the latest Hong Kong office report by Cushman & Wakefield.
The Chicag0-headquartered firm’s findings are consistent with reports from its competitors as the few tenants signing new leases are increasingly opting for lower-priced locations in Hong Kong, a trend which has helped to push up vacancies in Central after years of fierce competition for the district’s commercial towers.
Rents Head South as Vacancies Rise
While Hong Kong’s landlord’s had held out in the face of slackening demand earlier in the year, with 2019 now mostly gone, the rise in office vacancy levels has started to bring down the cost of obtaining space in the city.
“As sentiment in the office has soured considerably in Q3 and with no end yet in sight to the current instability, rents across all sub-markets will come under increasing pressure over the remaining months of this year and into 2020,” said John Siu, managing director of Cushman & Wakefield in Hong Kong.
City-wide net effective office rentals dropped for the second consecutive quarter to HK$74.7 ($9.53) per square foot (.093 square metre) per month, down two percent quarter on quarter, Cushman’s figures show. Central led the way down for office rents with rates for prime space in the core district falling by 2.8 percent during the third quarter, compared to the previous three months, to an average of HK$158.7 per square foot per month. So far this year, rents for prime Central space are down 4.3 percent.
Across the Greater Central area, rents slipped a more precipitous 3.2 percent on a quarter by quarter basis to an average of HK$133.7 per square foot per month and have now slid 3.8 percent during 2019. Boosted by the opening of Swire Properties’ One Taikoo Place project in Quarry Bay, Hong Kong East was the only commercial zone in the city to show rising rents during the third quarter with average rents gaining 0.3 percent last quarter to an average of HK$56.7 per square foot per month.
Overall rents in the city fell by 2.0 percent during the third quarter, according to the agency report, falling to an average of HK$74.7 per square foot per month and are now down by 2.2 percent since 1 January.
Empty Offices on the Upswing
The drop in rent comes as some 7.4 percent of office space in the Greater Central Area is now vacant according to Cushman & Wakefield — a nearly 3 percentage point increase from the 4.5 percent of the area’s total grade A space that was available at the end of the third quarter of 2018. The figure represented a 1.1 percentage point increase in availability compared to the previous quarter.
The rising vacancy level in Greater Central follows an occupier exodus which saw the commercial area lose 179,629 square feet of occupancy during the three months ending 30 September, according to the agency report, which showed that Hong Kong’s core business area has now lost net occupancy of nearly 357,000 square feet of occupancy during 2019.
The trend in the city’s core business district paralleled an overall rise in vacancy citywide with the seven commercial hubs tracked by the real estate agency showing an increase of vacancy of 1.2 percentage points over the last year with some 8.2 percent of Hong Kong’s grade A office space now vacant, according to the company.
While occupiers were moving out of the Central area, companies took up 295,214 square feet of space city-wide during the third quarter. So far this year total absorption of grade A office space across Hong Kong totals 433,241 square feet, according to the agency’s figures, a sum equal to just over 22 percent of the total amount taken up in the full year 2018.
The account of rising office emptiness was echoed by Cushman’s competitors at JLL in their Property Market Monitor report released at the end of September. The property consultancy’s report indicated that the combined vacancy rate of Hong Kong’s traditional business districts, including Central, Wanchai/Causeway Bay and Tsim Sha Tsui, in August rose above three percent for the first time in five years due to weakening leasing demand.
Tenants May Have a Happy New Year
With Hong Kong’s government seemingly unable to end the current political crisis and China continuing to clamp down on credit on the mainland, Cushman & Wakefield is predicting that that rents in Greater Central will have fallen between six percent and eight percent by the end of this year and the agency projects a further slide of between 8 percent and 13 percent next year.
Across Hong Kong the agency now expects rents will have declined by 5 to 7 percent by the end of 2019, with a further 7 to 9 percent decrease expected during 2020.
Retreat From Central Brings Down Hong Kong Rates
While overall absorption of office space is slowing in Hong Kong, the tendency among occupiers to opt for less expensive locations is also contributing to the slide in average rent levels. This migration to cheaper commercial centres such as Kowloon East and the Eastern district of Hong Kong island shows up in some of third quarter’s largest office leases and is already continuing during the first days of the fourth quarter.
In July, London-headquartered advertising agency WPP leased 111,000 square feet in K11 Atelier on King’s Road in Quarry Bay, a district where average grade A rental rates stood at HK$60 per square foot per month at the time the deal was signed.
Just this past week Swiss luxury watch brand Audemars Piguet was reported to have leased a 15,000 square foot space in the Landmark East tower in Kwun Tong at a rate of RMB 32 per square foot per month as it prepares to vacate its current pair of locations in Wanchai and Kwun Tong.