Hong Kong Tenants Hand Back Offices for 12th Straight Month

The amount of office space leased in Hong Kong contracted for the twelfth straight month in July as a combination of economic uncertainty, public health emergencies and political tension kept tenants on the sidelines of the world’s most expensive real estate market.

New leases of desk parking premises in the city dropped by 14 percent in July compared to a month earlier, with net take-up contracting by 277,100 square feet (25,743 square metres) according to a report released late last week by JLL.

The property consultancy’s figures confirmed an ongoing retreat by corporate office occupiers in Hong Kong, with those companies still willing to sign new rental agreements increasingly opting for locations away from the Asian financial hub’s punishingly expensive Central district.

Tenants Seek to Cut Costs

“Immediate leasing demand remains weak as occupiers hold off from making larger real estate decisions,” Alex Barnes, head of markets for Hong Kong at JLL said in a statement.

Referring to a growing trend of tenants handing back premises to landlords before the end of their lease agreements, Barnes added, “We expect to see more surrender space come to the market in the second half of the year as businesses realise internal occupancy strategies to save on overheads.”

During July tenants continued to surrender their corporate homes in Central, the city’s traditional core business area, according to JLL, with the area of office space leased in the district contracting by 29,200 square feet, or more than 10.5 percent of the city’s overall leasing contraction during the month.

By the end of June the amount of space surrendered in Hong Kong during 2020 had already reached an 18 year high of 1.3 million square feet, JLL announced last month.

Central Not Spared

By the end of July the amount of space surrendered by tenants in Central so far this year 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.

While JLL noted that office rents in Central dropped by just 0.7 percent in July compared to the previous month – the smallest decline of any of the city’s major office markets – this year’s downturn has already had an impact on the district’s best known landlord.

Hongkong Land, which owns Exchange Square, Jardine House and other prime Central addresses, reported last month that its underlying profit attributable to shareholders slid more than 24 percent during the first half of 2020 to reach just $353 million.

Those earnings, which were down from the $466 million the company recorded during the same period of 2019, came as the group saw vacancy in its blue-chip office portfolio climb to 4.5 percent by the end of June – a more than 35 percent increase over the level reported one year earlier.

Change Comes to a Financial Hub

While total leasing continued to contract last month, JLL noted that the pace of rental price decline slackened in July.

Office rents dropped by 0.9 percent city-wide compared to June to average HK$62.3 per square foot per month, with leasing rates declining most steeply in Tsim Sha Tsui, which suffered a 1.5 drop. Overall, Hong Kong office leasing rates fell by 13.2 percent through the first six months of 2020, JLL announced last month.

With the rate of rental decline abating the company’s analysts held out hope for a turnaround, while also predicting further changes in the market.

“We do however expect that medium term leasing demand will return and accelerate a greater change in occupancy behavior,” Barnes said.

The veteran broker added, however, that future demand may pop up in areas away from Hong Kong’s traditional core disricts. “Location sensitivities may also be further broken down following a long work from home experiment that many companies have adopted,” Barnes said.

Already occupiers appear eager to escape Central, which has the city’s highest rents at an average of HK$100 per square foot per month at the end of June.

Among July’s largest leases, asset manager Blue Pool Capital reportedly leased 16,000 square feet at Hysan Place in Causeway Bay to relocate and expand from its current home in Central’s Exchange Square.

JLL noted in its report that most of the leasing activity recorded during July took place outside of Central despite leasing rates in the district having already fallen more than 23 percent since their April 2019 peak.