• Mainland co-working space providers drive demand in the office market

    29 June 2018

    (28 June 2018, Hong Kong) – Knight Frank launches the latest Hong Kong Monthly Report. The overall vacancy rate of Central Grade-A office dropped to below 1% for the first time since 2001. Residential sales decreased 17% month on month in May, but prices continued to reach new heights. There were oversubscriptions in several primary residential projects. In the retail market, vacant shops in prime streets were being absorbed, as retailers became more optimistic about future sales.

    Grade-A Office

    Hong Kong Island

    Grade-A office leasing demand in Central remained strong in May. The vacancy rate dropped further to 0.8%, the first time since 2001 that it fell below 1%. Central rent continued its uptrend, rising 0.7% month on month. There is presently no large office space available in Central that suggests a near-landlord’s market there. Lack of space in Central coincides with the time when Mainland co-working space providers vie for dominance in the large-floor-plate segment.

    Kowloon

    Tsim Sha Tsui, Kowloon East and Cheung Sha Wan saw their vacancy dropped to its lowest level so far this year. With vacancies generally trending downwards, overall rents for Kowloon have rebounded in the second quarter, led by rising rents in Kowloon East and Tsim Sha Shui.

    Residential

    Although residential sales dropped 17% month on month to 5,522 units in May, there was no sign of falling demand. In fact, several new projects were massively oversubscribed. Meanwhile, the number of transactions in the secondary market remained stable, with over 4,700 transactions recorded in May. The primary transaction volume is expected to rebound in June as more units have been launched.

    The Hong Kong Monetary Authority raised the base rate by 25 basis points after the US interest-rate hike in mid-June. We expect Hong Kong’s prime lending rate to follow suit soon and for the first time since 2007. However, given the strong demand, we do not expect any impact on residential prices. Transactions may be deferred in the short term but should resume once the market has absorbed the rate increase.

    Retail

    Supported by growing retail sales, retail prospects have been improving since the second half of 2017. Given this generally optimistic sentiment there may be market opportunities for retailers to consider expanding their physical footprint. This consequently will help vacant shops in prime streets to be absorbed gradually. In contrast, retail space in prime shopping malls are close to full occupancy.

    Among core shopping districts, Central has the fastest absorption rate of vacant street shops, as the CBD is preferred by most retailers, especially international brands. Since street shop rents in the area have fallen in recent years, retailers who could barely afford the rents in the periphery of Central five years ago can now afford centrally located prime street space.

    Prime street rents should start to rebound once demand has revived and most the vacant shops have been taken up. We expect the downward adjustment in prime street rents to narrow to 5-10% for full-year 2018.

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