Tenants Continue to Flee HK’s Central as Govt Agency Shifts to Kowloon East

The migration away from the world’s priciest office location continues with one of Hong Kong’s biggest office deals so far in 2020 taking a major tenant away from its current home in the city’s Central district.

The Hong Kong Mortgage Corporation (HKMC) has agreed to lease a new 70,000 square foot home in Sun Hung Kai Properties’ Two Harbour Square in Kowloon East, according to Cushman & Wakefield and other market sources who spoke with Mingtiandi.

The transaction, which ranks as the city’s second largest office lease so far in 2020, according to C&W, allows the government agency to save around half off of current rates in its present home in the Cosco Tower on Queen’s Road in Central’s Sheung Wan area. The deal also fits the HKMC into a migration wave of tenants heading to emerging commercial centres in search of cheaper rents and more modern office facilities.

Heading to Kowloon to Save Cash

“Particularly in the challenging business environment this year, Kowloon East is an attractive option for large space occupiers seeking cost savings,” noted Reed Hatcher head of research in Hong Kong for Cushman & Wakefield.

The HKMC is reportedly paying around HK$28 per square foot per month for its new home in Sun Hung Kai’s three-year-old tower, which would bring its monthly rent bill to approximately HK$1.96 million per month.

The government bureau currently occupies 60,000 square feet in the Cosco Tower, which is part of the Grand Millennium Plaza complex just west of Central district’s prime office area. Once its new home is ready the HKMC is said to be retaining a single floor in the Cosco Tower, while moving the majority of its team to Kowloon East. The news of HKMC’s new office lease was first reported by the Hong Kong Economic Times.

Current rents in the tower on Queen’s Road start at approximately $43 per square foot per month, ranging up to $80 according to JLL, with the HKMC occupying a mid-zone space on the 34th floor.

Already this month a tenant signed a 2,225 square foot lease in the Grand Millennium Plaza’s other tower for $41 per square foot, with a 4,200 square foot deal also being signed at nearby Crawford House at $84 per square foot, and Two IFC scoring a 7,311 square foot lease at $195 per square foot, according to Midland IC&I.

Central’s Struggles Drag On

Despite the new lease in Two IFC this month, the cocktail of 2019’s protests, an intensifying Sino-US trade war and this year’s coronavirus pandemic have put Central rents and vacancy rates under pressure.

Grade A office rents in Central fell 17.6 percent in the first half of 2020, according to mid-year report by JLL, which forecast them to plunge a total of 25 to 30 percent by the end of the year.

By the end of July the amount of space surrendered by tenants in the city’s traditional business hub was equal to 2.1 percent of the district’s total grade A office premises, with vacancy in the prime area rising to 5.7 percent – a 0.1 percentage point increase from the June level.

Decentralisation Still Trending

In relocating to Kowloon East, the HKMC will be following a path set down in recent years by many of the banks with which it cooperates.

In 2016 Citibank shifted from Central moved to Citi Tower, also in Kwun Tong, and JP Morgan Chase moved into Nan Fung and The Link’s Quayside in the same area last year.

2020’s largest office deal to date, Adidas’s lease of around 75,000 square feet, also took place in the Quayside during the first quarter of this year, according to Cushman & Wakefield.

Although 2020 has been a subdued year for leasing in Central, the situation is not quite as bleak in office locations that offer lower rents, as many occupiers become wary of the leasing costs of the world’s priciest office market.

“Among transactions in the first half of the year, tenant decentralisation and cost-saving requirements remain the major source of demand,” said Alex Barnes, JLL head of markets for Hong at the agency’s mid-year virtual press conference. “Vacancy rises in decentralised markets have not been as large as in core submarkets.”

Along with Kowloon East, the Island East area — which includes Swire’s Taikoo Place complex in Quarry Bay — experienced only 8.2 and 8.1 percent rental declines, respectively, in the first half.

During that same period, Causeway Bay and Tsim Sha Tsui clocked in just above those levels, with rents dropping 9.2 percent in both districts.