Hong Kong’s office landlords may have reached peak suffering from rental slump with stocks at bargains, Morgan Stanley says

Some stocks have factored in as much as a 40 per cent decline in rental from the current level, which is unlikely, Morgan Stanley says
Work-from-home may have smaller impact on Hong Kong’s office market compared with other Asian financial capitals

Hong Kong property

Sandy Li

Published: 11:30am, 30 Jul 2020

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Hong Kong’s office landlords may have reached peak suffering from the rental slump, according to US investment bank Morgan Stanley. The work-from-home arrangement may not inflict much more pain.

Office rents in the city declined by 13 per cent in the first half this year, the most six among Asian cities, it said, driving stock prices deeply below their asset backing. While the trend may persist this year, the damage is already in the price, it added.

The assessment suggests investors have been too pessimistic in discounting the fortunes of some of Hong Kong’s biggest commercial property owners, even though the local economy remains in deep recession, vacancy rates at the highest in a decade and the departure of some technology firms are threatening to hollow out the Central business district.

Developers including Sun Hung Kai Properties, Swire Properties and Hongkong Land control about US$345 billion worth of top-grade office space in the city, or 42 per cent of the value across six financial capitals in Asia, Morgan Stanley estimates.

“HK Land and Swire Properties have factored in as much as a 40 per cent decline in rental from the current level, which is unlikely, in our view,” the bank said in its July 27 report. Sun Hung Kai Properties’s valuation “is one of the cheapest the stock has shown historically.”

Share of the three companies have slumped by 28 to 41 per cent over the past 12 months, compared with an 11 per cent decline in the benchmark Hang Seng Index.

Based on the bank’s work-from-home survey of 689 white-collar workers from July 20-23, demand for office space may only be eroded by 3 per cent between 2020 and 2023, while rents may decline by 7 per cent on base-case scenario. Demand is seen falling more in Tokyo and in the Australian market, it said.

The survey showed that 64 per cent of respondents preferred to work from home partially. Only 19 per cent of them would like to do that every day of the week after the Covid-19 is past, while 17 per cent did not want it at all in future.

As Hong Kong tenants call the shots, can work-from-home inflict more damage to office market?

Not every and all industries can adopt work-from-home plans such as the front-line staff in the banking and property sectors, said Patrick Mak, executive director and head of Kowloon office services at Knight Frank. It is likely that demand for office space will only shrink slightly because of the factor, he added.

While beaten-down stock prices offer some upside prospects, some industry analysts warn of weaker market conditions ahead. Many office tenants are asking for rent concessions, said Nigel Smith, managing director at Colliers International Hong Kong.

“We have seen an increase in tenants looking to surrender all or part of their premises,” he said. “This is more off the back of the global recession, rather than changing working habits or work-from-home.”

Tenants in Asian financial capitals are expected to surrender almost a tenth of their office space by 2022 because of the work-from-home arrangements, Morgan Stanley forecasts. Overall rents could slip by 10 to 15 per cent across the region.

That works out to a combined 12 million sq ft of Grade A space, the bank said. In Hong Kong, that amount of space would be equivalent to about two-and-a-half blocks of the International Finance Centre. This suggests a slide in demand and rents is likely to persist as companies face a new wave of Covid-19 infections.

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