Corporate tenants in Hong Kong are enjoying greater opportunities to relocate to upgraded premises this year as the city’s struggles with the Omicron variant slow leasing activity and open up more office space, according to recent research by Colliers.
“Office leasing activities will be largely focusing on flight-to-quality relocation, space optimisation or consolidation moves over the year, as most office occupiers are looking for cost-saving options, and they are now presented with more leasing options in the market given 4.5 million square feet (418,000 square metres) is scheduled to complete in 2022,” said Fiona Ngan, head of office services at Colliers Hong Kong.
With many companies unable to visit office locations during the first quarter, vacancy across the city climbed by 0.9 percentage points compared to the same period a year earlier to 10.9 percent by the end of March, according to Colliers’ figures. The slowdown in leasing has meant reductions in office rents for occupiers, with overall leasing rates down 1.3 percent in the first quarter. This is helping to make office locations which were once beyond the budget of some occupiers into more attractive options.
The market challenges have also had an impact on investment activity, which was dominated by bargain hunters in the industrial and retail sectors during the first quarter, as trades of income-earning property assets fell by 46 percent compared to the October to December period to total just HK$11.2 billion ($1.4 billion), Colliers’ data shows.
Net take-up of office space in Hong Kong grew by 157,000 square feet during the first quarter, mostly supported by new supply completion and leases negotiated since end-2021 and closed in early Q1, according to Colliers.
The cooling in Hong Kong’s traditional business hubs means that vacancy in Central climbed to 8.3 percent during the first quarter, with rents, which now average HK$103 per square foot per month in the district, expected to slide by a total of 5 percent during 2022.
While the waning of the latest COVID wave is already allowing more workers back to the office, with the Russian-Ukrainian war and uncertainties over when Hong Kong’s border with the mainland will be reopened, Colliers predicts a muted 2022 for the city’s office market and encourages asset owners to stay in dialogue with potential tenants.
“Market uncertainties since the start of 2022, including the outbreak of Omicron, geo-political tensions and stock market volatilities, have disrupted the decision-making process of investors and occupiers, hence slowing office leasing and investment momentum in Q1,” said Rosanna Tang, Head of Research, Hong Kong & Greater Bay Area. “With cash-rich investors still keen on acquiring quality assets, and landlords becoming more flexible in negotiation to retain tenants or secure new leases, we are hopeful of a gradual improvement in market sentiment and momentum in H2.”
While tenants have been slow to act in the city’s traditional business core, some occupiers looking for upgrades took advantage of the downturn to pick up large spaces in emerging locations in Kowloon.
During the first quarter a consumer goods firm leased 44,100 square feet at the NEO project in Kowloon East, while a social services organisation took up 27,900 square feet at the nearby One Kowloon.
Even pricier locations in Kowloon remained active during the period, with a financial services firm agreeing to lease 26,000 square feet at Sun Hung Kai’s International Commerce Centre (ICC) in West Kowloon.
That activity was reflected in leasing rates with average rents in Tsim Sha Tsui climbing by 1.6 percent during the quarter, while pricing in Kowloon East climbed by 0.2 percent compared to the preceding three months. While Kowloon East continues to have the highest level of vacancy of the city’s major commercial hubs, that rate stayed flat at 14.1 percent in the first quarter, despite the broader slowdown.
Industrial in Style
While investment activity during the first quarter fell sharply compared to the last three months of 2021, the HK$11.2 billion in deals recorded still represented an increase of 19 percent compared to the same period a year earlier, with industrial and retail trades constituting 74 percent of total transactions, according to Colliers.
“Overall, investors are still eager to look for acquisition opportunities while pricing remains attractive for most sectors,” said Thomas Chak, executive director of capital market and investment services at Colliers Hong Kong.
Chak’s team predicts that with investors showing resilient demand for data centre and cold storage facilities, industrial assets, which accounted for 38 percent of investment transaction volume during the first quarter, will continue to be sought after.
With deals such as PGIM Real Estate’s HK$850 million acquisition of the Travelodge Central hotel during the first quarter becoming more common, Chak foresees more investors picking up hospitality assets for conversion into co-living or quarantine facilities during the coming months. Colliers also expects office deals delayed during the Omicron wave to get back on track during the second half of the year.
While the city is fighting its way back from the most recent COVID bout, Colliers cautioned that restrictions on the mainland border would keep the investment market subdued this year.
Chak said that, “Whilst the timeline of mainland-Hong Kong border reopening remains uncertain, this could limit flow of cross-border capital from mainland investors, who used to be one of the key drivers before the pandemic but only accounted for 2 percent of investment market volume in Q1.”
In the absence of big ticket asset trades in the coming months, Colliers now forecasts that investment transactions in Hong Kong will slip by 5 percent in 2022 to HK$70 billion, representing an adjustment from the firm’s previous forecast of 15 percent growth this year.