The price for a developer to maintain occupancy in a prime office property in Hong Kong’s declining market might just be a 12 percent rent cut, according to operating statistics released by one of the city’s top commercial landlords late last week.
During the first half of this year Swire Properties kept office vacancy in its Pacific Place complex at 3 percent, the company said Thursday in a statement to the Hong Kong stock exchange, however, fresh leases and renewals for desk space in the commercial development were priced at an average of 12 percent below earlier rates.
Five years ago Swire had a waiting list of multi-nationals and regional giants hoping to lease floors or rooms in Pacific Place’s 2,186,433 square feet (203, 126 square metres) of office space, according to tenant making inquiries in the time. Since that high water mark, however, Hong Kong’s office market has been contracting, with tenants leasing a net 326,000 square feet less grade A space as of 30 June compared to the end of last year, according to a recent report by JLL.
At the same time that rising economic uncertainty is making tenants more cautious regarding new leases, established destinations like Pacific Place are also having to compete with lower rents in prime buildings in Central, as well as the launch of new properties which are adding 960,000 square feet of new supply in the city’s traditional commercial core within this year.
Market Nears 13% Vacancy
Swire Properties, which is part of a conglomerate which also controls Cathay Pacific Airlines and the world’s fifth largest bottler of Coca-Cola, reported negative rental reversions, or changes in leasing rates on new, renewed or reviewed deals, across all of its major office developments in Hong Kong, including an overall 9 percent drop in pricing at its Taikoo Place complex in Quarry Bay.
The company also still has 44 percent of the one million square feet of offices in its Two Taikoo Place project in Quarry Bay remaining unlet nearly one year after the tower’s completion in 2022. Swire received the occupancy permit for its one million square foot One Taikoo Place in September of 2018, with the building declared as fully occupied just two months later.
While the developer held occupancy steady in Pacific Place, it was able to cut vacancy in its Taikoo Place portfolio from 96 percent at the end of last year to 94 percent as of 30 June, the report showed. This was despite average vacancy in the Hong Kong East submarket, which includes Taikoo Place, climbing to 12.5 percent at the end of June from 11.2 percent on 31 December, according to figures from JLL.
Vacancy in the Greater Central area, which includes Pacific Place, climbed from 8.8 percent at the end of last year to 9.4 percent on 30 June, the agency’s statistics show. Across the Hong Kong market, vacancy climbed to an average of 12.6 percent at the end of June from 12.2 percent on 31 December, JLL said. Inquiries to Swire Properties went unanswered at the time of publication.
Rents Slide 31% in Four Years
While Swire Properties did not include financials with its latest update, the company’s cross-town rivals at Hongkong Land recently declared a loss attributable to shareholders of $333 million for the first half of 2023.
The division of Jardine Matheson, which is known for properties such as Jardine House and the Exchange Square complex, saw committed vacancy in its Central portfolio rise to 6.9 percent at 30 June from 4.7 percent a year earlier.
While vacancy was on the rise, average rents in the company’s office towers, which are among the most expensive in the world, declined to HK$107 per square foot per month from HK$111 per square foot at the end of 2022.
Hongkong Land’s Central portfolio, as well as Swire’s Pacific Place, are having to offer more attractive deals to tenants leery of committing to pricey new leases at the same time that Henderson Land is busy offering space in its 465,000-square-foot The Henderson project, which is expected to be completed later this year.
Also, coming on line in Central this year is CK Asset’s Cheung Kong Centre Two, with that 498,000 square foot property already signing up tenants.
Grade A office rents across Hong Kong declined by an average of 2.1 percent during the first half of 2023, according to JLL, with the market now down 31 percent from its 2019 peak.