The Hong Kong office market is facing unprecedented challenges, with record-high vacancy rates and a 40% decline in rents since 2019, according to Savills in its Market in Minutes – Hong Kong Office Leasing report for September 2024.
Record-High Vacancy Rates
The Hong Kong office sector is currently experiencing unprecedented challenges, with vacancy rates reaching levels not seen even during historical downturns such as SARS and the 2009 Global Financial Crisis. Particularly in prime business districts, such as Central, the vacancy rate has surged to a staggering 2.2 million square feet. This situation is the result of several factors, including weakened demand due to economic performance, evolving tenant preferences, and the impact of high interest rates.
Significant Rental Price Reductions
As landlords contend with intense competition in the market, many have resorted to considerable rental price cuts. This has resulted in an approximately 40% decrease in rents from their peak in 2019. This strategy highlights the ongoing economic uncertainties that the sector must navigate and it faces a period of significant transformation and adjustment.
Temporary Uptick in Demand for Adjacent Offices of Receivers’ Properties
Interestingly, neighbouring office buildings have experienced a short-term increase in demand as businesses seek alternative locations. This shift is largely due to the prevailing high-interest-rate environment, which has intensified debt challenges for many prime office property owners. Additionally, the downturn in the Chinese real estate sector has led to a rise in properties placed under receivership, further exacerbated by declining office leasing activities. Inexperienced receivers managing Grade A office buildings may introduce operational inefficiencies, with rigid rental packages, cost-cutting measures, and inadequate services potentially resulting in tenant dissatisfaction and increased vacancies. While this temporary trend has driven up occupancy rates in adjacent offices, it may lead to broader implications for the market as landlords adjust their strategies in response to heightened competition.
Relocation Trends to Prime Districts
Nevertheless, this phenomenon may prove counterproductive in the medium term. As affected landlords consider lowering rents to attract lost tenants, there is a risk of triggering a broader cycle of declining rents across the market. The softening of rents in core areas has introduced a new dynamic; in response to narrowing rental differentials, some financial institutions are relocating their non-core operations back to prime locations. Notable relocations include ICBC (Asia) moving from Kwun Tong to Hung Hom, Dun & Bradstreet shifting from Kwun Tong to Admiralty, and Vistra (Tricor) transferring from Kwun Tong to Causeway Bay.
Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “The impact of high interest rates and changes in tenant preferences have reshaped the office leasing landscape, leading to a historical high office vacancy rate and continuous decline in rents.”
Mr. Ricky Lau, Managing Director, Head of Leasing of Savills said, “Looking ahead, based on the average net office take-up of 1.3 million square feet per annum from 2011 to 2019, the office vacancy rate is projected to reach 17% by 2027. While Hong Kong’s current vacancy rate of 14.8% may seem high, it remains relatively moderate compared to other major global cities, such as London (10%), Sydney (12%), and New York (28%).”Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing of Savills said, “However, with new demand still hard to come by in the short term, rents are expected to continue their downward trajectory for the remainder of the year. The US rate cuts are likely to boost business sentiment, which may help mitigate these rental declines over the next few months. We predict a decline of 5% to 10% in rents for 2024.”
