Hong Kong property

Office decentralisation trend in Hong Kong continues but rents remain high

PUBLISHED : Tuesday, 08 August, 2017, 4:59pm
UPDATED : Tuesday, 08 August, 2017, 7:40pm

Even as more companies relocate their offices away from Hong Kong’s central business district to escape high costs, rents in Central have climbed back up to their 2008 peak levels driven by sustained demand from mainland Chinese corporates and a tight vacancy situation.

According to the midyear Hong Kong property review published by real estate services firm JLL, the demand for Grade A offices in the first half of this year was focused outside of Central. But leasing demand in Central was still largely underpinned by mainland Chinese financial firms expanding and setting up operations – they accounted for 50 per cent of all new lettings in the first half.

This trend drove rentals in the CBD area up 3.6 per cent to HK$116.4 (US$14.88) per square foot, on par with the record high levels seen in 2008.

Hong Kong’s record office rents drive more firms out of Central to outer suburbs

“Not only Chinese corporates, but anybody who wants to make a presence in Hong Kong wants to be in the major financial centre of Central,” said Alex Barnes, regional director and head of Hong Kong markets at JLL. “Until they get both the recognition in Hong Kong and the size and scale, it is still worth it to pay for a high rent 10,000 sq ft office in Central to demonstrate that they belong in this market.”

The latest mainland Chinese tenants in Central include CMB International Capital Corporation, which is leasing 30,000 sq ft at Three Garden Road, and Bank of Communications, which has taken a lease for 10,100 sq ft at the Man Yee Building to accommodate its expansion plans.

However, not all companies can afford or are willing to pay such high rents.

“With rents increasing in Central, finance and insurance companies have been moving to the east [of Hong Kong island] for cost savings,” said Zac Tang, senior analyst at real estate service firm Colliers in Hong Kong.

“Looking forward, decentralisation will be driven by the completion of new quality buildings, improving infrastructure and amenities in non-core areas and rising rents in Central,” he said.

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One of the infrastructure projects that is driving the decentralisation trend is the Central-Wan Chai bypass. When completed at the end of 2018, travelling from Central to the start of the Island Eastern Corridor expressway will only take five minutes via the bypass, reducing travel time for commuters and alleviating existing heavy traffic congestion in the area.

Property developers in the new business districts have fully embraced opportunities brought about by the decentralisation trend. For example, Swire Properties, the biggest landlord in Quarry Bay, recently reported a spike in numbers of high-profile tenants setting up offices in the area, including financial services companies Prudential, FWD Insurance and AllianceBernstein, and three leading international law firms.

Since July last year the developer has invested HK$15 billion in redeveloping Taiko Place. Two triple Grade-A office towers are also being built at the location, each spanning a total gross floor area of 1 million sq ft, in addition to 69,000 sq ft of open landscaped gardens.

But that doesn’t mean the good days for landlords in Central are over.

“Central will remain expensive for a long time. There is a lot of demand in this area that has yet to be met,” said Barnes. “Central landlords don’t need to be as soft on their position to retain tenants because they are also juggling very small vacancy portfolios and trying to create more space for their existing clients.

“The decentralisation trend won’t be a long term negative impact for them in Central.”

Hong Kong’s overall Grade-A office vacancy rate in the second quarter was 4.4 per cent, while Central’s vacancy rate remains below 2 per cent.

“It’s almost a win-win scenario for both the landlords and companies,” said Barnes.