Hong Kong property

Gloomy outlook for Central office rents in Hong Kong, as economic storm clouds gather, analysts say

  • Monthly office rentals in Central began to soften in November, ending a three year trend of rising rates
  • Gathering economic storm clouds are likely to put further downward pressures on rents in 2019, with analysts forecasting declines of up to 6 per cent
PUBLISHED : Sunday, 23 December, 2018, 11:02am
UPDATED : Sunday, 23 December, 2018, 10:49pm

Rents of grade A offices in Central, the most expensive globally, could see a decline of up to 6 per cent in 2019 after they dropped for the first time in November amid growing trade and economic concerns, according to analysts.

Monthly office rents in Central and the surrounding areas of Sheung Wan and Admiralty will fall by 4 to 6 per cent to about HK$154.90 (US$19.79) per square foot, according to Cushman & Wakefield.

“The ongoing trade dispute between the US and China, coupled with continued tightening capital controls in China, will cause a slowdown in economic activity,” said Keith Hemshall, head of office services at the consultancy.

Colliers International also forecast a downbeat year for leasing rates in Central and Admiralty, with monthly grade A office rentals to decline 3.8 per cent in 2019.

“Mainland companies have lost their growth momentum amid geopolitical and economic uncertainty,” said Zac Tang, assistant manager of research at Colliers, citing the consultancy’s Hong Kong Annual Occupier Survey Report 2018.

“In addition, we expect confidence among financial occupiers, which take up 54 per cent of grade A office space in Hong Kong’s central business district, to be affected by the drop in the Hong Kong stock market from its early 2018 peak, and by rising interest rates.”

Average rents of grade A offices in Central declined by 0.3 per cent to HK$163.7 per sq ft in November from the prior month, according to Knight Frank, reflecting the end of a rising trend that lasted for almost three years.

Hong Kong commercial property and housing markets face slowdown as trade war, souring sentiment bite

For example, the asking rent at Bank of America Tower in Central dropped to HK$97 from HK$99 per sq ft from October to November, a decline of 2 per cent, according to data from CBRE.

“The external economy is not good. Stock markets have been dropping. Plans [of companies] to move to bigger spaces have been delayed and mainland companies have started to surrender space,” said David Ji, head of research and consultancy at Knight Frank. “This is a sign of a turning point.”

In September, HNA Group surrendered eight office floors totalling 90,900 sq ft in Three Exchange Square which were pre-leased in May 2017, but never occupied, according to Savills.

Ji said that companies moving out of Central in search of cheaper locations will result in further downward pressure on rents in Central.

For example, multinational law practice Eversheds Sutherland will set up a new office in One Taikoo Place, relocating from Gloucester Tower in Central. The move will enable the firm to reduce its rental overhead from over HK$90 per sq ft per month to HK$60 to HK$70 per sq ft, a savings of more than 22 per cent, according to Savills.

JLL also noted that demand for office space softened noticeably in the second half of the year, especially among mainland Chinese companies, which accounted for 30 per cent of all new lettings in Central, a drop of 18 percentage points from 2017.

“Demand for office space will continue to soften next year due to the increasing uncertainty in the city’s economic outlook arising from a slowing mainland China economy and uncertainty around the US-China trade war,” said Ben Dickinson, head of agency leasing at JLL. “Central is the most exposed to the slowdown in mainland demand.”

Hong Kong’s Central business district ranked as the world’s No 1 in terms of occupancy costs, which includes taxes, for offices for the fourth year running in 2018, according to JLL.