Office rents fall for first time in five years in Q2

Leasing costs fell 0.4% led by declines in Central and Wanchai/Causeway Bay.

Territory-wide average office rents fell for the first time in five years by 0.4% QoQ, with leasing costs in prime Central and Wanchai/Causeway Bay extending their 1.2% QoQ drop in Q1 to 2% QoQ in Q2, a report by Cushman & Wakefield revealed.

Rents in Greater Central and Kowloon East also dipped by 0.7% and 0.4% QoQ, respectively. Growth in the other submarkets was led by Hong Kong East, which was up 1.4% QoQ, but the territory-wide average rent still edged down.

According to John Siu, Cushman & Wakefield’s managing director for Hong Kong, Hong Kong East has the tightest availability (3.9% when excluding the recent new completion) and quality office space that is supporting rental growth there.

Also read: Hong Kong East and Wanchai vacancy rates tighten in March amidst relentless tenant decentralisation

“In Greater Central and Wanchai/Causeway Bay, although availability went up by at least 1 pp from their respective Q1 figures, it is still considered to be at a sustainable level (below 10%),” he said. “The fact that 2020 will see no new supply in any submarket will lend support to Central's rentals, however the outlook for H2 2019 is clouded by economic and geopolitical uncertainties, as occupiers await a clearer picture before expansion plans can be resumed."

Amidst the drop in rents, overall absorption rebounded from the negative territory in Q1 to 498,134 sqft in Q2, the report added.

The rebound in net absorption in the overall Grade A office market was largely due to the conversion of strong pre-leasing over the past couple of years in new completions totalling 410,700 sqft in Hong Kong East and Kowloon East.

On the other hand, weakened occupier demand, plus some cases of multinational corporation (MNC) decentralisation and downsizing, have led to a negative absorption in Greater Central (-182,352 sqft) and in Wanchai/Causeway Bay (-90,795 sqft).

Also read: Decentralisation underpinned 2.6% rise in Quarry Bay rents to $54.65 psf in February

"Weakened demand from mainland firms in core areas, plus MNCs becoming more cost-conscious as trade tensions remain unresolved, have led to a steady decline in overall absorption over the past year, from 1.05 million sqft in H1 2018, to 868,100 sqft in H2 2018, and to 479,325 sqft in H1 2019,” Siu highlighted.

Meanwhile, the record-high growth of 14.9% in visitor arrivals, which is said to be the most significant increase in nine years, did not lead to corresponding growth in retail sales. Most of the core retail rents recorded smaller quarterly growth than that in Q1, and Central rents continued to drop, Cushman & Wakefield, noted.

Retail sales fell for four consecutive months, led by a drop in jewelry & watches at -4.4% YoY.

Also read: Retail sales down 1.3% to $40b in May

As a result of reduced spending, rental growth in core districts such as Tsim Sha Tsui and Mongkok recorded a smaller quarterly rental growth than that in Q1 at 0.7% QoQ and 1% QoQ, respectively. Causeway Bay rents were up 0.7% QoQ, and Central experienced a further drop of 3% QoQ, which was almost double that of Q1.

In terms of vacancy, Central edged up to 8.6% from 7.1% in Q1, whilst the other core districts stayed the same.