• The rate of rental decline fell to 3.5% in Q1/2021 from 5.1% in the previous quarter, representing seven consecutive quarters of falls.
• Wanchai/Causeway Bay (-4.3%) registered the largest rental fall among all sub-markets on Hong Kong Island, partly due to its exposure to co-working operators and financial services firms.
• Central posted a 15-year high vacancy rate of 7.6% or 1.2 million sq ft in Q1/2021.
• Major international banks have shed over 350,000 sq ft of space over the past 12 months as Work-From-Home policies were implemented or extended and business prospects dimmed.
• PRC corporates remain active in the office leasing market, taking up space in core areas.
• A substantial IPO pipeline this year will support demand from a range of associated banks and professional services providers. 

Hong Kong – 9 Apr 2021 Rental declines have generally moderated, but corporate downsizing continues and 2022 and 2023 threaten a supply overhang, according to Savills in its Hong Kong office leasing report for Q1 2021.

Rental decline slows

Over the quarter, Grade A rents registered a fall of 3.5%, lower than the 5.1% recorded in Q4/2020. Hong Kong Island rents fell by -4.0% in the quarter, with rents in Central, Wanchai/Causeway Bay and Island East declining by 3.8%, 4.3% and 3.5% respectively. Wanchai/Causeway Bay has posted the largest rental fall among all submarkets on Hong Kong Island for a seventh consecutive quarter and rents in the district are now down 28.3% from their peak in Q2/2019 due to the closure of co-working space and the downsizing of financial institutions and business service providers. Meanwhile, Kowloon rents were relatively stable, registering a 2.8% fall. Rents in Tsim Sha Tsui, Kowloon East and Kowloon West fell by 5.2%, 2.2% and 1.4% respectively. Kowloon West rents have proved relatively resilient since Q3/2019 because downsizing has been less common for corporates situated in the area, where rents are relatively cheap.

Coworking and banks downsize, PRC companies expand

The coworking industry is still in a consolidation phase. WeWork will close their centre in Causeway Bay, which accounted for 90,000 sq ft or one third of the total floor area of Tower 535, in relation to downsizing by HSBC. Some flexible workplace brands, however, are taking the opportunity to expand their footprint, evidenced by IWG in its global partnership with Standard Chartered to lease 50,000 sq ft in Kwun Tong. Banks have begun to downsize and surrender space partly because of the implementation of Work-From-Home policies and partly because of downbeat business prospects, with Standard Chartered, DBS, Deutsche Bank AG and Societe Generale reported to be cutting floor space.

Against a background of corporate downsizing, PRC corporates are the exception, with financial institutions expanding their presence in Central. PRC leasing demand has been strong and remains a major demand driver, and the floor area of PRC new lettings in 2020 was actually up by 4% compared with 2019.

Central’s vacancy rate rises to 15-year high

The overall vacancy rate hit 8.9% in Q1, up from 8.3% at the end of 2020. Hong Kong Island vacancy rose from 6.8% to 7.4%, mainly driven by an increase in vacancy in Wanchai/Causeway Bay (from 8.4% to 9.5%). Central's rate edged up from 7.3% to 7.6% in Q1, posting a 15-year high. Kowloon side's vacancy rose from 10.3% to 10.8%, led by Tsim Sha Tsui, where vacancy rose to 9.5% during Q1, due to major insurance companies and financial institutions reducing their occupancy. Kowloon East (13.8%) remained the submarket with the highest vacancy rate.

Despite the weak office take-up, vacancy is not likely to rise due to supply constraint in 2021, similar to 2020. Only two projects in Wong Chuk Hang and Yuen Long are expected to be completed over the year, providing 697,596 sq ft (GFA) in total. Next year will be a different story however, as 5.4 million sq ft is due to enter the market, much of it in decentralised and fringe locations, followed by 2.8 million sq ft in 2023, much of it in core locations. With over 5.3 million sq ft of vacancy currently, it is highly likely that vacancy will pass 10% unless office demand stages a major rebound which seems unlikely at this point. Under this scenario rents will continue to soften into next year.

Strong IPO pipeline should boost office demand

The IPO pipeline is one of the few positive aspects of the office leasing market. After a strong year in 2020, local IPOs are reported to have surged by 822% in Q1 on a year-on-year basis, in terms of funds raised. There are estimated to be 170 IPOs in 2021, with US-listed Chinese enterprises and the New Economy the main drivers of activity. Since IPOs involve the participation of investment banks and a slew of business service providers, a strong IPO pipeline can therefore shore up demand for floor space, helping to support rents in Central and Wanchai/Causeway Bay which tend to be the home of choice for many such financial institutions and business service providers.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: “As news of lease surrenders becomes more commonplace, a record IPO pipeline and bullish demand from Mainland corporates should offer landlords some comfort.”

Mr. Ricky Lau, Deputy Managing Director, Head of Office Leasing said: “As office leasing demand begins to recover later this year, however, substantial new supply in 2022 and 2023 should see rents come under further downward pressure.“

Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing said “Given rents have fallen substantially from their peak, corporates are more willing to take up space in high-quality buildings in prestigious locations. Thus we believe that Grade AAA and Grade AA offices in core business districts will be fully occupied before Grade A offices in decentralized markets when the market regains its momentum.“