Hong Kong’s Central district is witnessing a sharp drop in leasing demand, as corporate occupiers and major retail chains shy away from the cost of operating in the world’s most expensive commercial district.
Office leasing rates fell by 2.4 percent city-wide in June, according to a report from property consultancy JLL. Space in prime office buildings such as the Center on Queen’s Road in Central is now available at 10-year-low rents and retailers are now able to secure locations in the commercial district for 70 percent less than they would have paid a few years ago.
The rental downturn comes as local authorities have begun rounding up newspaper owners and opposition politicians following the imposition of a security law earlier this summer which has added a new level of uncertainty to a city which has suffered social unrest and a pandemic-driven lockdown over the past 12 months.
Tenants Surrender Central Offices
Grade A office vacancy in Hong Kong’s Central rose to 5.6 percent in July, up from 5.0 percent in June as weak demand drove the total space leased in the district down by 136,500 square feet during the month, according to property consultancy JLL. Overall office vacancy in the city climbed to 7.6 percent, which is also a historic high.
Surrender space, or office area given back to landlords by tenants backing out of their leases, also has been rising in the submarket, reaching just over 460,000 square feet in the month of July alone, when it made up about 35 percent of the surrender space across the city. By mid-year tenants had already handed back to landlords 1.3 million square feet of office space in Hong Kong — an 18-year high for the city — with 74 percent of that on Hong Kong island.
At the beginning of this month local media reported that a unit in the Center on Queen’s Road in Central had just leased for HK$42.5 per square foot per month — a decade-long low for the prime property. With the owner having purchased the 22nd floor unit at a rate of HK$43,500 per square foot in September 2018, the property is now generating a yield of just 1.17 percent.
During June the sharpest rental contractions occurred in Tsim Sha Tsui and Kowloon East, which recorded 2.6 percent and 2.7 percent monthly drops, respectively as rates fell an average of 2.4 percent city-wide compared to May.
Leasing in New Locations
While Kowloon locations suffered the most severe price reductions in June, JLL sees a trend toward more occupiers seeking locations outside of Hong Kong’s priciest district as cost considerations lure companies away from Central.
In June 95 percent of new lettings as measured by area took place outside of Central, a roughly 20 percentage point increase over the same period last year, according to JLL’s latest Property Market Monitor released this week.
That trend is also showing up on the financial performance of Central’s biggest landlord, Hongkong Land, which recently reported a 24 percent drop in underlying profit in the first half of this year.
The owner of such prime properties as Jardine House and Exchange Square reported that vacancy in its office portfolio climbed to 4.5 percent in the first half of the year – a 35 percent increase over the midway mark of 2019.
Retail Stores Struggle
Central’s retail sector also suffered as inbound tourism ground to a halt amid compulsory quarantine orders that remain in force, with total visitor arrivals in June standing at about 8,000 — down 99.7 percent compared with last year, according to the Hong Kong Tourism Board.
Retail sales in June tumbled 24.8 percent compared with June 2019, according to government statistics with a number of international retailers looking to shut down stores or move to lower-priced locations in the face of closed borders and economic gloom.
In July local media reported that sporting goods brand Decathlon had leased a 8,500 square foot shop in the Entertainment Building at 30 Queen’s Road in Central for around HK$800,000 per month. The price, which is equivalent to HK$94 per square foot per month, is around 70 percent less than the previous tenant, fashion brand MCM had been paying to lease the same space.
Hongkong Land’s retail portfolio, which includes the Landmark complex and other prime spots in Central, has shown the impact of lower spending and lockdowns during the first half of this year, as rent relief and low take from turnover hit the company’s income.
In the first half of 2020 average shop rent for Hongkong Land’s retail properties declined more than 36 percent to HK$151 per square foot — down from HK$239 per square foot during the same period of 2019.
Also on Hong Kong island, American lingerie brand Victoria’s Secret closed its last retail store in Causeway Bay in June, as a sharp decline in Hong Kong’s tourism industry and economic losses caused by the pandemic has taken a toll on shopping.
As fashion labels flee, it has opened Hong Kong’s prime locations to some new tenants.
In July, Outback Steakhouse leased a 3,000 square foot first floor unit, also at the Entertainment Building in Central, for a monthly rent of HK$300,000, according to JLL. Meanwhile, lifestyle retailer, MUJI launched its largest flagship location in the city at Telford Plaza in Kowloon Bay, with a focus on food items.
“International mass retail operators targeting local customers are more interested in expanding in Hong Kong as rental levels become more agreeable, said Nelson Wong, head of retail for JLL in Greater China. “We will likely see a more diverse retail environment in the medium to long term.”