New heights for Hong Kong prime office rents, as mainland companies fuel demand

Hong Kong has become even more costly in terms of high-end office space, as strong demand among mainland Chinese companies continues to push up rents in the central business district, according to data for the first three quarters of the year.

Grade A office rents in Hong Kong rose 2.9 per cent from the beginning of the year through September, reflecting the highest level in a decade, according to the SCMP-JLL Grade A Office Rental Index, a gauge tracking 123 grade A office buildings in Hong Kong.

Hong Kong’s Central district remains the world’s most expensive place to rent a prime office, followed by Beijing’s Finance Street, Hong Kong’s West Kowloon, and New York’s Midtown Manhattan, according to a CBRE survey in September.

“There is very little vacancy in the market, and demand has been fairly steady for the last couple of years,” said Alex Barnes, JLL’s head of Hong Kong markets. “The demand is focused on the top end of the market, mostly notably the trophy asset, which tends to be dominated by mainland Chinese firms.”

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The current vacancy rate is below 2 per cent in Central, the world’s smallest and priciest central business district. Prime office rents in the district have climbed 4.4 per cent so far this year, the most among the city’s districts.

Mainland Chinese firms continue to be the main driver of the rise in rents, as multinationals are more focused on managing costs, said Barnes.

A total of 370,000 square feet of prime office space in Central was taken up by mainland companies in the first three quarters of this year, accounting for 48 per cent of the total leased this year, according to JLL. Another 80,000 sq ft will be transacted by mainland companies soon.

Beijing’s crackdown on capital outflows since the end of last year has resulted in a drop in new mainland Chinese companies entering the market, but those who already have a presence in Hong Kong continued to take more space, Barnes said.

The rent for grade A offices in Central is likely to rise 8 per cent for 2017, said Thomas Lam, the head of valuation and consultancy at Knight Frank Hong Kong.

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The low vacancy rate and high rents can potentially harm Hong Kong’s competitiveness when it comes to attracting multinational companies, as they may find it harder to rent an office in Hong Kong than in Singapore or Shanghai, said Lam.

While rents in Central are likely to continue higher, downward pressure is mounting in other areas, such as Kowloon East, which has been zoned as the city’s second major business district, said Marcos Chan, CBRE’s head of research in Hong Kong, southern China, and Taiwan.

“Overall rents are getting close to the peak but pressure mainly comes from decentralised areas, where vacancy and future supply is higher,” Chan said.

The demand from international companies excluding those from the mainland has softened, which reflects the moderate growth in the local economy in recent years, said Barnes.

“Rental growth has slowed a little over the last couple of quarters, but we still expect the market to rise over 5 per cent by the end of this year,” said Barnes.

The average monthly rent for grade A offices was HK$71.3 per sq ft at the beginning of October, according to JLL. To be classed grade A, office floor areas must cover at least 4,000 sq ft, have central air conditioning, and be decorated and fitted to top standards.