Hong Kong Office Market Decline Tapers Off in September

Hong Kong’s troubled Grade A office market saw rents fall again in September, albeit at a slower pace, as vacancies continued to climb in most districts.

Rents contracted further across all major office submarkets in the financial hub, according to the latest Property Market Monitor report released by JLL. The overall market recorded a 1.3 percent drop in September from a month earlier after rents fell 1.7 percent in August, signalling a let-up from the average monthly decline of more than 2 percent in the first half of 2020.

“The overall leasing demand in the office market remains subdued as many companies adopted a wait-and-see attitude,” said Paul Yien, senior director of markets at JLL in Hong Kong. “But we saw a number of companies decided to lease new office space to consolidate their offices in different locations and upgrade when the landlords are willing to offer more flexible leasing terms.”

JLL attributed the slackening pace of decline to the perception that COVID-19 is becoming more contained.

Watching and Waiting

Rental pressure was more pronounced in the traditional core office submarkets on Hong Kong Island, where rents fell more than 1.5 percent from August as demand stayed weak and vacancy rates continued to rise.

Overall net absorption amounted to negative 243,500 square feet (22,622 square metres) as a significant amount of space in Central came back to the market from decentralising tenants.

The vacancy rate in Central leapt to 6.8 percent from 6 percent in August as office space previously occupied by the Securities and Futures Commission returned to the leasing market after the government agency relocated to a nine-floor space in Swire Properties’ One Island East project in Quarry Bay, from its previous home in Central’s Cheung Kong Center.

Vacancy rates in most other districts edged higher or held steady, but Kowloon East saw its ratio of empty space shrink to 13.4 percent from 13.6 percent in August.

Limited demand was underpinned by a few flexible space operators taking space to open new centres in Causeway Bay. Regional provider Compass Offices leased 15,700 square feet of lettable area at Hysan’s Lee Garden Two, while Sky Business Centre took up 17,000 square feet of gross floor area at Wharf’s Times Square in the bustling retail district.

In Central, New York law firm Sullivan and Cromwell leased 14,000 square feet of net lettable area at Hongkong Land’s Alexandra House as it relocated from another Grade A building in the district.

Retail Investment Subdued

The property investment market remained sluggish as the third quarter drew to a close, said Nelson Wong, JLL’s head of research in Greater China.

“Sales of office properties stayed relatively slow in September with just a handful of strata-titled office floors above HK$20 million ($2.58 million) being transacted,” Wong said.

On the retail side what transactions are happening, are mostly taking place away from the city’s tourist-dominated hubs, with that trend likely to continue through year-end.

“Investment activity in the retail market was also subdued last month, particularly in core shopping areas,” Wong said. “Investor interest stayed focused on assets in non-shopping areas as the retail market is mainly supported by local consumption. We believe the trend will continue this year.”