Higher rents to drive more offices to “head East” in Hong Kong in 2018

High rents will continue to drive offices in Hong Kong to move to the eastern part of the city as rental in Greater Central is estimated to grow 7-9% in 2018, said Cushman & Wakefield recently.

The Hong Kong office market saw another record breaking year in 2017 as Greater Central rents topped global levels again with an annual increase of 7.5% that surpasses all other districts, the real estate service firm observed.

Mainland firms: 54% of new lettings in 2017

The rental growth was supported by solid leasing demand from mainland Chinese companies which accounted for 54% of the new lettings (in terms of total size) transacted in Greater Central so far this year, quickening the pace of decentralization by companies wishing to stay cost-competitive.

While the office leasing market was comparatively more upbeat, the retail leasing market also showed increasing signs of recovery thanks to a rebound in tourist arrivals by 3.4% and sales of luxury goods by 5.6%.

The rental correction for high street space in Hong Kong that started since 2014 is nearing an end in Causeway Bay, but Central is still expected to continue to come under pressure due to a relatively higher vacancy rate there of 7.1%.

After a subdued 2016, office absorption was back in the black in 2017, amounting to 617,300 sqft. Growth was led by submarkets such as Greater Central, Greater Tsimshatsui, Hong Kong South and Kowloon East. That marked a large contrast to the negative take-up of 80,895 sqft witnessed in 2016.

This has been reflected in the solid leasing demand from corporations for Hong Kong's office space. First and foremost the fight for prime office space in Greater Central has been dominated by mainland Chinese companies, represented by the likes of HNA Group (93,600 sqft), Industrial Bank (54,600 sqft), CMB International (29,200 sqft) making headlines this year with their sizeable leases in prime buildings. 

"The banking and finance sector was the driving force behind the surge in Prime Central rents, so much so that they reached their six-year record high at HK$143.6 in Q4 2017 -- also a global record, according to our latest international survey,” said John Siu, Cushman & Wakefield's Managing Director, Hong Kong. “The substantial rental growth in Greater Central was also a result of low availability. By Q4 2017, the availability rate in Greater Central shrank from 3.9% in Q3 to 3.7%, which was the lowest level among all submarkets."

Shortage in Greater Central won't ease till 2022

"Mainland Chinese companies, decentralization and the co-working sector all contributed to the shaping and re-balancing of leasing demand in various submarkets. We expect these factors to continue to underpin leasing demand and rental growth in general, and in Greater Central in particular where the shortage of space will not ease until 2022 when the new Murray Road car park redevelopment and Peel Street/Graham Street development schemes totaling 565,500 sqft come on-line,” Siu said.

 

The decision between Hong Kong East and Kowloon East
Decentralization became the trend for multinational corporations and companies to stay cost-competitive by reducing rental overheads. From Magic Circle law firm Freshfields Bruckhaus Deringer to BNP Paribas, traditional Central tenants from professional services to the banking and finance sectors are embracing non-core areas such as Hong Kong East in this game-changing relocation trend. 

Companies could meet their consolidation or expansion requirements with larger floor plates available in Kowloon East, as shown by numerous transactions which pushed the district's absorption level to 76,700 sqft surpassing all other submarkets in Q4, said Keith Hemshall, Cushman & Wakefield's Executive Director, Head of Office Services, Hong Kong.

“However, for traditional Central tenants, Hong Kong East is a more viable alternative for relocation thanks to its proximity to Greater Central, improving highway connectivity (with the completion of the Central -- Wanchai Bypass in 2019), new and high quality office space and maturing F&B / retail supporting amenities. We expect more companies to 'head east' in 2018 as part of a cost saving and office upgrade strategy," he added.

 

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