Office rents down 1.5% in Q4 2019

Wanchai/Causeway Bay recorded the largest rental decline.

Overall office rents fell faster by 1.5% in Q4 2019 compared to the 1% decline in Q3 2019, according to a Savills report.

Amongst all sub-markets, Wanchai/Causeway Bay (-2.5%) recorded the largest rental decline, followed by Central (-1.7%) and Tsim Sha Tsui (-1.6%). In addition, Kowloon rents also saw rental declines as rents in Kowloon East and Kowloon West dropped by 0.7% and 0.4%, respectively.

The social unrest continues to hit the retail and hospitality sectors badly, with the retail sales value in November 2019 falling by 21.2% compared to the same month in 2018. Some operators in Wanchai/ Causeway Bay are reported to be looking to surrender space, leading to rising vacancy in the district. As an example, Chinese co-working operator Kr Space ceased operations in Times Square.

“Since the headquarters of large retail brands are concentrated in decentralised areas such as Island East, Kowloon East and Tsim Sha Tsui, relocation doesn’t add up because potential savings are slim. Many will therefore have to look to downsizing or surrender if they are serious about cutting overheads,” Savills said.

However, Central rents are expected to hold up a bit better in 2020 as the largest tenant demand groups are finance-related and have been less affected by the turmoil. This is said to be supported by the fact that Hong Kong was again the largest IPO market in terms of funds raised globally in 2019 at over $300b. Hong Kong also remains a favourite of multinational corporations who consider the city a golden gateway to the China market.

“Singapore is an obvious alternative but longer flight times to China and high operational costs are still factors which will render any mass corporate migration unlikely. PRC firms, meanwhile, are expected to remain committed to Hong Kong given the active IPO market in the SAR, with little downsizing in evidence to date,” Savills noted.

Furthermore, Hong Kong had a weak office take-up during the year. This contributed to the increasing vacancy rate, which reached 4.65% in December 2019 (2.74 million sqft), up from 3.03% in December 2018.

Island East (1.1%) recorded the lowest vacancy amongst all sub-markets as the largest landlord in the district, whilst Tsimshatsui has seen vacancy tick up to 2.7% and a lack of tourists could hit the insurance industry in the area. There is also a sharp rise in vacancy in Kowloon East last year from 5.7% to 9.7%, due to the slow absorption of nearly 2 million sqft of new supply.