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Office buildings in the financial district of Central, Hong Kong. Photo: Dickson Lee

Desperate Hong Kong office landlords may ditch fixed monthly rent for ‘membership’ schemes to lure tenants as Covid-19 changes work habits, says JLL

  • As landlords compete for fewer tenants wanting less space they may have to embrace a revolutionary new leasing concept, offering different levels of ‘membership’ according to a tenant’s exact needs
  • It would mean office landlords becoming more like co-working space providers as they move away from the traditional fixed rent regime
Hong Kong’s office rental market is likely to undergo a radical change, with some landlords switching to a “tiered membership” model similar to that used by co-working space providers, according to property services giant JLL.
As the Covid-19 pandemic continues to wreak havoc in the world’s most expensive commercial property market, landlords are coming under increasing pressure to compete for corporate tenants, many of whom are adopting more flexible working arrangements and drastically cutting costs.

In order to lure them, the landlords may have to embrace a revolutionary new leasing concept in which they offer tenants different levels of “membership” in the office premises according to what services they use. The idea has not been tried yet in Hong Kong, but is in use in cities such as Sydney and London.

“As a user in an [office building], I want to have a car parking space, I want a gym membership, a club membership and a place for fine dining. I have to sign five contracts if I also want to have a flexible office space as well,” said Gavin Morgan, chief operating officer in Greater China and managing director in Hong Kong at JLL.

Traditionally, corporate occupiers are expected to pay a fixed cost, based on the amount of space rented and the length of the leasing terms.

A monthly membership fee – a similar pricing regime to that commonly used by flexible work space providers – can be charged according to what services the tenant uses. For instance, a big company might opt for 100 “diamond” membership cards, giving those staff members access to flexible office and meeting room spaces, use of car parks, gym and restaurants. Gold membership may offer all of those services minus the car parking, and silver could exclude access to the car park and the gym, Morgan said.

“With more corporates in the mainland and Hong Kong adopting flexible working arrangements, tenants are looking for more cost-efficient and productive ways to utilise space,” said Morgan.

Having a more flexible leasing model may help landlords increase their cash flow and meet the evolving demands of occupiers in a “new normal”, he said.

Hong Kong had 7.8 million square feet of office space – greater than the size of four Central Plazas – sitting vacant in September, the most since 1999, according data from CBRE. An additional 950,000 sq ft in surrendered space – returned by tenants before their leases expire – is also available in the market.

Savills said rents for grade-A offices have dropped 14 per cent from their peak in the second quarter of 2019.

Office demand is being sapped as more big companies move towards work-from-home arrangements.

Hong Kong banks lose appetite for prime space in world’s costliest city

But that could change again in the future, when a coronavirus vaccine is rolled out, said Rommel Lau, director of asset management at Nan Fung Development’s Hong Kong property division.

“[The membership model] may work in future but it still needs the details to be worked out. It means landlords would turn into co-working operators,” said Lau.

“Yes, the market outlook is on a bumpy ride with short term turbulence. When the coronavirus vaccine proved to be effective to contain the pandemic outbreak, business activities and people will go back to normal work in office.”

Nan Fung is pre-leasing its 1.2 million sq ft office tower, part of Airside, the mixed-use commercial project in Kai Tak, the site of Hong Kong’s former airport.

The builder has lowered the starting rents per month from HK$50 per sq ft to HK$40 per sq ft, said Lau.