Hong Kong office market recovery is falling into place as Central rents plunge

Successive shocks in the past three years have made Hong Kong’s central business district more competitive compared to its global and regional peers

More falls in rents, decentralisation, improved connectivity and renewed mainland interest in Hong Kong will drive a revival in leasing and investment activity

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Central remains the world’s most expensive office market, but a rental correction is bringing its rates closer to its peers. Photo: AFP

Published: 9:15am, 22 Dec 2020Updated: 9:18am, 22 Dec 2020

In a presentation to the media this month, global commercial property services firm Cushman & Wakefield came out with a slew of statistics that painted a bleak picture of Hong Kong’s office market.

The net absorption of grade A office space in the first 11 months of this year fell by 2 million square feet, putting leasing activity on track for its worst year on record. The average decline in rents across all districts reached almost 19 per cent, while the vacancy rate surged to 12 per cent, a near 16-year high.

Central, the world’s most expensive office market, has been hit particularly hard. In greater Central, which includes Admiralty and Sheung Wan, net take-up dropped by more than 430,000 square feet, the third straight year of shrinking demand. This has pushed up the vacancy rate to 10.5 per cent, causing rents to plummet more than 21 per cent.

In prime Central – which C&W defines as the 12 highest-quality buildings in greater Central – rents have fallen 30 per cent from their peak in the first quarter of 2019. A quadruple whammy of China’s slowdown, the trade war, Hong Kong’s recession and the Covid-19 pandemic has brought about the sharpest rental correction among the world’s leading office markets since the 2008 financial crash.

However, for a market whose exorbitant rents made it an outlier even among the world’s priciest office markets, Central was long overdue for a meaningful adjustment. Although the district remains the world’s most expensive office market, it no longer sticks out like a sore thumb.

In an indication of how successive shocks in the past three years have made Hong Kong’s central business district more competitive compared to its global and regional peers, Central’s occupancy costs – the key elements of which are rents, service charges and government taxes – are on a par with New York’s Midtown. JLL’s latest Premium Office Rent Tracker Report, published on December 9, shows they were as much as 32 per cent higher a year ago.