With Hong Kong poised to see in the new year with the completion of its seventh month of pro-democracy protests, the city’s prime commercial district now has more empty office space than at any time in the past four years.
Vacancy levels in Hong Kong’s Central district, which boasts some of the world’s priciest office space, stood at 3.5 percent at the end of November, property services firm JLL said in a newly released report — more than double the level reported at the same point last year.
That rising vacancy rate comes as the hub that has traditionally hosted leading banks and the law firms and accountancies eager to serve their customers has experienced its thirteenth consecutive month of negative net take-up, according to JLL, as more tenants move out in search of cheaper quarters elsewhere and fewer new occupiers move in.
Even the new leases signed within the greater Central area were dominated by tenants looking for lower cost space within the district, JLL said, with tenants moving a twenty-minute walk east from top addresses such as the International Finance Centre or Exchange Square to Admiralty able to save up to 15 percent off the asking rent for a grade A office.
Rising Vacancy, Plunging Rents
Rising vacancy in Central was mirrored in Hong Kong’s other core submarkets, with the amount of empty space also rising in Wanchai, Causeway Bay and Tsim Sha Tsui. With cost-savings gaining priority, lower priced markets such as Quarry Bay and Kwun Tong were winning new tenants, with vacancy falling from 3.0 percent at the end of October in Hong Kong East to 2.8 percent at the end of last month, and Kowloon East unoccupied space levels slipping from 12.9 percent to 12.8 percent over the same period.
“Leasing activity was largely dominated by tenants seeking more cost effective options within the submarket,” Alex Barnes, Head of Markets at JLL in Hong Kong, said in a statement, noting that, “Amid the ongoing trend of tenants seeking more cost-effective options within Central, decentralised markets such as Hong Kong East and Kowloon East tightened slightly.”
Across all districts, the Asian financial hub experienced a net withdrawal of 91,900 square feet of office space overall in November, leading to a vacancy rate of 5.9 percent citywide, the city’s highest since April 2010.
New lettings for the first 11 months of the year were 31 percent lower than over the same period in 2018, while overall grade A office rents have now fallen 3.4 percent.
The same report predicted that rents in Central, which have slid 6.3 percent so far in the second half of this year, would drop up as much as another 20 percent in 2020 as vacancy rates continue to rise off the back of weakening demand.
Vacancy Rises as Mainland Tenants and Co-working Operators Leave
JLL said demand for office space in Central is being hit from several quarters. Not only have tenants withdrawn their expansion plans as unrest in the city drags on, but demand from mainland China firms fell by 34 percent during the first 11 months of 2019, compared with the same period last year.
A pair of mainland finance firms selected new spaces outside of Central during the past three months, as cost savings begins to edge out trophy addresses among China’s once free-spending giants. China Huarong (Macau) reportedly leased 20,300 square feet (1,886 square metres) at One Pacific Place, while Guosen Securities leased 13,500 square feet in the same building, with both of the local units of Beijing-headquartered firms choosing the Swire Properties complex in Admiralty as they prepare to vacate grade A offices in Central, according to JLL.
Following WeWork’s botched IPO in October another group of occupiers once eager for prime floors in Hong Kong has also lost its appetite with new leases by shared office providers having dropped by 26 percent for the year up to December compared with last year, according to JLL.
HK Commercial Asset Prices Could Drop 20% in 2020
JLL’s report of the decrease in Hong Kong office demand comes just a few weeks after the consultancy documented a deep dip in investment in the same sector this year, with capital investments seeming to lead rental rates into the downward cycle.
Investment in Hong Kong office properties fell to HK$13.6 billion in the second half of 2019, the lowest half yearly total in 11 years, according to preliminary JLL.
The consultancy’s researchers attributed the decline in deals in part to a reversal in what had been a trend toward higher levels of investment by mainland investors and corporates, with only 14 percent of capital poured into the office market this year coming from mainland China, compared with 35 percent in 2018 — the lowest level of participation since 2014.
Investment in retail property also fell off, with purchases of street front shops and mall space totalling HK$15.9 billion in 2019 — down 67 percent from last year — JLL noted.
“We expect the capital values of Grade A offices and high street shops to drop 15-20 percent next year, while capital values of prime warehouse will drop 5-10 percent,” said Joseph Tsang, chairman and head of capital markets at JLL in Hong Kong.