Office rents in Hong Kong on the brink of soaring past all-time high set before 2008 financial crisis
Demand from Chinese companies and limited office space coming on to the market will soon push rents past the historical high of HK$210 per sq ft set in 2008, say market observers
Office rents in Central, the most expensive place to rent office space in the world, is closing in on levels reached before the 2008 financial crisis, with market watchers believing a new high will be reached soon, driven by a paucity of supply and rapid inflow of Chinese companies.
“We’ve seen landlords asking for HK$200 per square feet,” said Ben Dickinson, head of agency leasing at JLL Hong Kong, adding that the last time such a demand was seen was in 2008.
The highest recorded price for office space in Hong Kong was HK$210 per sq ft more than 10 years ago, according to JLL data.
“We will definitely see some units in some prestigious buildings reach deals at over HK$200 per sq ft this year. It will surpass the peak within this year, if not, we will see that in 2019,” he said.
In the first four months of the year, average rents of grade A offices in Central had increased 1.7 per cent to HK$120.7 per sq ft. It is already 3 per cent higher than the last peak seen 10 years ago.
Meanwhile, rents in prime towers in Central are nearing 2008 levels.
Leasing rates in grade A1 buildings such as IFC and Cheung Kong Center have also risen by 1.7 per cent this year to HK$176.7 per sq ft, according to JLL. Although it is still 4.4 per cent lower than the all-time high of HK$184.9 per sq ft set in 2008, it is close to being breached.
“There’s almost no supply on Hong Kong Island at all in 2018, with very limited supplies coming through in the next three to four years,” said Dickinson.
Some market watchers are giving a more aggressive forecast, betting that the city will definitely see a historical high in office rents this year, mainly driven by the regular flow of demand from mainland Chinese companies.
“We see a lot of mainland securities firms and banks trying really hard to find a spot in high-quality buildings,” said John Siu, managing director of Cushman & Wakefield. “Those buildings will definitely see rents hitting HK$200 this year. They want to announce [to the world] that they are expanding to Hong Kong. Rents are not their major concern.”
Hong Kong had about 8 million square metres of office space in 2017, which is expected to rise to about 9.2 million square metres in two years’ time. In comparison, Shanghai will see its top grade office market providing 11 million square metres by 2020, according to JLL.
New supply of office buildings in the city are being absorbed too quickly, giving tenants hardly any breathing room on negotiating rents.
“I would love to stay in Central as long as the rent is below HK$100 per sq ft. But if the offer is like HK$138 per sq ft, I will have to pass,” said Simon Mak, chief executive officer of Ascent Partners, who has an office in Hong Kong Trade Centre. “Most of our clients are nearby and it is really convenient.”
In the current environment, Mak will find it extremely difficult to find new space in Central in his price bracket if he looks to expand his company.
Office space in newer office buildings in other parts of the island are quickly being snapped up.
According to JLL, One Taikoo Place in Quarry Bay has been 80 per cent pre-committed, which is set to open at the end of this year. Lee Garden Three in Causeway Bay is about 98 per cent done, with the global investment bank Goldman Sachs being one of the pre-signed tenants.
Goldman Sachs will move its back office staff out of The Center, the world’s most expensive office tower, which sold for HK$40.2 billion last November, in Central to Lee Garden Three when its lease expires in December. It will, however, retain its office in Cheung Kong Center in Central.
The factors drawing companies to newer office towers in other areas of the city are the modern facilities and bigger space, while experts see soaring rents as the one major factor forcing multinationals to leave Central.
In December, last year multinational law firm Freshfields Bruckhaus Deringer moved from Two Exchange Square in Central to One Island East in Quarry Bay, on the opposite end of Hong Kong Island.
JPMorgan plans to relocate its Hong Kong team to a building by the riverside in Kwun Tong next year, while law firms Baker McKenzie and Simmons & Simmons have announced they will move to One Taikoo Place in Quarry Bay by the third quarter this year.