Hong Kong office rents are expected to increase by no more than five percent in 2019, despite record-low vacancies in prime commercial districts, as occupier demand slows after years of competition for space in the regional finance hub, according to global real estate services firm JLL.
Office rents will continue to grow in Asia’s priciest city, according to the Hong Kong Property Market Review and Forecast report released by JLL this week, helped along by a limited new supply of grade A office space over the next two years.
This year has seen a trend toward commercial decentralization in Hong Kong, with many global financial services companies and law firms opting to escape the high rents of Central district in search of alternative office locations offering lower costs and newer buildings. Even one of the Hong Kong government’s anchor tenants in Central, the Securities and Futures Commission, has been in talks to move to Quarry Bay from its long-time spot at Cheung Kong Centre.
Office Rents Rise Amid Tight Vacancy
Office rents have risen seven percent in HK this year as corporate competition for prime locations has driven average rents in Central to HK$127.4 ($16.3) per square foot per month, while alternative destinations in Wanchai, Quarry Bay and Taikoo, Tsim Sha Tsui, and Kowloon East have also seen office rents rise at rates of 7.7 percent, 7.4 percent, 5.8 percent, and 3.9 percent, respectively.
Wanchai and Causeway Bay area saw the fastest growth in rents, mainly boosted by the new opening of Hysan Development’s Lee Garden Three and Chinachem’s One Hennessy office tower, which has already been 80 percent leased in advance of its expected opening in the first quarter of next year.
However, JLL expects the competition for space to taper as occupiers expand their offices less quickly in the coming months.
“Demand for office space will continue to soften in 2019 due to the uncertainty in the city’s economic outlook arising from a slowing mainland China economy and uncertainty around the US-China trade war,” said Ben Dickinson, Head of Agency Leasing at JLL. “But the current extremely tight vacancy environment will support office rents to grow a further zero to five percent next year.”
JLL said the increasing rents this year have been driven by a three-year high in the net absorption rate, which has climbed to about 2.8 million square feet so far this year and helped to drive vacancy rates down to record low levels less than two percent throughout the city’s primary business districts, apart from Kowloon East.
Leases by Mainland Corporates Drop 18 Percentage Points
Despite slowing growth in demand for office space in the city during the second half of 2018, bookings of office properties remained strong this year. JLL attributed the shrinking office appetite to a slowdown in letting by mainland Chinese companies, which accounted for just 30 percent of all new lettings in Central district in 2018 compared with 48 percent in 2017.
According to JLL’s figures, 76 percent of the new private commercial Grade A office space completed in 2018 has already been leased, while 72 percent of the office space scheduled to be delivered in 2019 has also been booked or is under negotiation.
The Centre Does Not Hold
This year has seen launches prime office towers in non-traditional commercial centres in Hong Kong such as the retail playground of Causeway Bay and the island’s Eastern corridor. Swire Properties’ newly opened One Island East in Taikoo Place, which was fully leased before it was completed, added one million square feet of grade A office space to the city’s office market. JLL itself has announced that it will move into the 69-storey office tower at the beginning of next year.
Another Grade A office building that opened during 2018 was Lee Garden Three in Causeway Bay. Hysan Development’s commercial tower has attracted tenants such as blue-chip investment bank Goldman Sachs, which leased five floors in the new building after it decided to pull out of The Centre building in Central district in April.