Mainland private equity investor Hony Capital has leased out an upper level unit in Hong Kong’s Two International Finance Centre for HK$130 ($17) per square foot per month – a 35 percent discount on what an equivalent space in the city’s second-tallest tower had rented out for two and a half years ago.
The Beijing-based firm, which is a unit of investment holding company Legend Holdings, has taken on 10,000 square feet (929 square metres) in the 2003-vintage building in Central for a total of about HK$1.3 million per month, according to a report in the Hong Kong Economic Times.
The firm secured its discounted space in Hong Kong’s second-most expensive commercial property at a time when prime office rents in the Asian financial hub have fallen for 11 consecutive months, following a downturn in the property market worsened by the coronavirus pandemic.
Getting a Better View of the Harbour
In a move that takes Hony Capital 200 metres closer to the harbour front, the firm is relocating to the 88-storey skyscraper from its current base at neighbouring Exchange Square, and will be downsizing by 23 percent from its 13,000 square feet home in the three-tower complex.
The mainland private equity firm’s new home had been vacant since the beginning of February, according to information from property consultancy Cushman & Wakefield, and had been on the market for around nine to 10 months. CBRE is understood to have advised Hony Capital on leasing the premises.
The average rental rate for a full mid-zone floor in Two IFC was HK$154.4 per square foot per month at the end of April, according to the agency’s data. The only office building in Hong Kong more expensive than Two IFC is CK Asset’s Cheung Kong Centre, which leased for an average of HK$158.1 per square foot per month at the end of last month, according to C&W.
Despite moving into plusher digs at the IFC, the firm will be paying less than the most recent comparable transaction at its soon to be former home, after China Guangfa Bank signed a lease in January to lease 13,000 square feet at One Exchange Square for HK$135 per square foot per month.
Based on Guangfa Bank’s deal, which was the last lease of over 8,000 square feet in Central prior to Hony’s lease in IFC, the mainland private equity investor could be saving up to HK$500,000 per month compared with the estimated HK$1.8 million monthly rent it would have paid to remain at One Exchange Square.
Hitting a High Two and a half Years Ago
Leasing values in Two IFC reached their peak in 2017, according to publicly available information, when a pair of units in a high floor were leased out by an international fund manager for HK$590,000 per month.
That tenant is said to have taken up that 2,930 square foot space two and a half years ago at HK$200 per square foot per month, according to property agency data, with Hony’s latest lease representing a markdown of more than one third from that price.
Since then, leasing values in the 415 metre building developed by Henderson Land and Sun Hung Kai Properties have continued to fall.
Just under one year ago, US investment firm Millennium Management agreed to lease half of a mid-zone floor in Two IFC for around HK$170 per square foot per month or 24 percent more than what Hony will now being paying in the tower’s upper floors.
In early 2019, Korea’s Mirae Asset Financial Group took up a 13,000 square foot space on the 43rd floor in the mid-zone of the skyscraper for HK$2.34 million per month, or HK$180 per square foot.
As of April, average rent in 2IFC was HK$154.4 per square foot per month – two percent lower than the HK$158.1 per square foot per month average in the Cheung Kong Center, according to Cushman & Wakefield.
Falling Rents in Central
Hony’s cut-price lease comes as office rental values in Hong Kong’s most expensive commercial district seem to be in an unending slide.
According to a report released by Knight Frank at the end of April, average prime office rents in Central fell to HK$153.4 per square foot per month during March – a drop of 20.6 percent from the same month in 2019.
The deal also follows a drop-off in demand from firms from mainland China looking to lease space in the Asian financial hub, which according to Cushman & Wakefield’s Reed Hatcher is due to capital controls imposed by Beijing and a slowing economy in the mainland.
“From the peak in 2017 when mainland Chinese firms accounted for 57 percent of the space leased in Greater Central, mainland firms’ share of leasing activity in the submarket had fallen to just 20 percent last year,” said Hatcher.
Hatcher added that demand from mainland China is expected to remain weak in the near term, as the the COVID-19 outbreak has dampened the country’s economic growth.