Whole floor office space still hard to find in greater Central

The office sector, despite being the best-performing sector in the Hong Kong commercial real estate market, has been experiencing a slowdown in leasing momentum since the beginning of January. The net take-up slowed noticeably year-on-year across all submarkets in the first five months of 2016, with overall net take-up declining to 175,000 square feet from 1.7 million sq ft in the same period last year.

Greater Central, including core Central, Admiralty and Sheung Wan, which were particularly sought after by banking, financial institutions and Chinese corporations last year, saw a drastic drop in net take-up with 302,000 sq ft in the first five months of 2015 to negative 42,000 sq ft in the first five months of 2016. The severe decline in net absorption is partly due to this year’s lower vacancy levels. Less available space usually implies lower net take-up. At the end of 2014, there was 846,000 sq ft of vacant space in Greater Central, which is equivalent to a vacancy rate of 3.8%. This is compared with only 268,000 sq ft of available space at the end of 2015.

The banking and financial sectors as well as Chinese firms were aggressively leasing space last year. We saw considerable demand in Citibank Plaza which concluded several leasing activities in the first half of 2015, with BlackRock taking four floors, Bloomberg and Thomson Reuters each leasing two floors, and Hani Securities (owned by Fosun) leasing one floor. A total of 128,700 sq ft of space was taken up. At the end of 2015, the average vacancy level of Greater Central was 1.2 per cent.

The high occupancy rates and historically-low vacancy has pushed average rents to peak levels. However, the global market volatility in recent months coupled with a fear of China’s economic slowdown has raised concerns about the sustainability of office demand in Hong Kong. Is the slower leasing momentum an initial sign of a shift in Hong Kong moving towards an occupier’s market?

We believe that there are more options for small-to-medium size occupiers in Greater Central, taking into account that vacant space in this area are usually smaller and there is an increasing amount of shadow space from surrender leases. According to data from CBRE, 74 per cent of the vacant space in Greater Central available between now and the end of 2017 are those smaller in size.