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.
In contrast, opportunities for large occupiers which usually require whole-floor or multi-floor space are still extremely slim. Greater Central only has a total of 23 whole-floor spaces available between now and the end of 2017, which adds up to a total of 233,000 sq ft, around 37 per of all total vacant and shadow space. Only three of the available whole-floor spaces have contiguous floors, one of which has a total area of less than 20,000 sq ft. Only 11 floors have a floor plate size of over 10,000 sq ft.
Nonetheless, Greater Central is traditionally a critical market with strategic significance, especially for Chinese financial institutions looking to internationalise and build their brand. Demand from Chinese companies for office space in Greater Central remains strong despite all the uncertainties in the market. While the financial giants are continuously looking for en-bloc acquisition opportunities, Chinese companies looking to enter the Hong Kong market are eager to secure any type of site in the Greater Central area.
New supply in Central in the next few years will remain at a low level until the completion of the Murray Road Car Park site redevelopment project, which is expected to be complete by 2020 at the earliest. It is expected to offer 450,000 sq ft of new office supply. Meanwhile, other than the Shanghai Commercial Bank Tower which has recently completed and the upcoming Chinachem Central II, which is scheduled for completion at the end of 2016,, there will be no other new grade A supply in Central in the near-term.
Despite the lack of supply, we believe office rents are currently reaching peak levels. Rents will continue to climb this year, but growth will be front-loaded to the first half of 2016. Overall rents went up 2.3 per cent in the first five months, and Central rents have increased by 4.9 per cent over the same period. Rental growth will gradually fade out towards the end of 2016 when pre-leasing activity for projects coming in 2017 becomes more active. Rents will likely start falling in 2017, but Central will be the least vulnerable as the supply situation will remain very limited.
Rhodri James is executive director, advisory & transaction services – Office at CBRE Hong Kong