OFFICE RENTAL HONG KONG

Jan 2024

Leasing momentum pulled back to its usual seasonally slow momentum in Q4 2023, with gross leasing volume falling by 35% q-o-q to 815,200 sq. ft.. This brought full-year leasing volume up to 4.1 million sq. ft., representing growth of 9.3% y-o-y. The October-December quarter saw leasing activity led by relocation demand, with tenants continuing to seek fully-fitted premises to minimise CapEx. However, most companies kept expansion plans on hold.

Net absorption registered 318,600 sq. ft. thanks to relocation and upgrading demand in Kowloon and earlier pre-commitments to the newly completed 83 King Lam Street in Cheung Sha Wan. Full-year net absorption stayed positive for a second consecutive year, reaching 216,000 sq. ft.

Despite delays to a few new projects, slow pre-leasing activity in the 1.3 million sq. ft. of new supply added in 2023 ensured vacancy reached a record high 14.3 million sq. ft. by year’s end. Overall vacancy rose to an all-time high of 16.4%, growing by 1.1-ppt over the 12 months.

The vacancy overhang led to a 2.3% q-o-q fall in rents, bringing the full-year decline to 6.0%. Core Central and Hong Kong East saw the biggest falls, registering 3.4% q-o-q and 3.1% q-o-q, respectively. Rents fell 6.3% y-o-y and 7.7% y-o-y, respectively, over the full-year.

CBRE

Jan 2024

Amid slow growth and market recovery in 2023, Hong Kong real estate witnessed mixed sentiment across office, retail and industrial sectors as rebound in tourism has fuelled high-street rental growth. Conversely, the demand for warehouse assets and Grade A offices weakened over prevailing geopolitical and trade tensions.

Looking ahead in 2024, we expect improvement in global economic condition and Hong Kong’s business environment, bringing optimism in the demand and transactional activities for commercial assets. Grade A Office rental levels will remain under pressure in 2024, with majority of tenants taking wait-and-see approach

Colliers

Dec 2023

Hong Kong's commercial property leasing and investment markets experienced a slower-than-expected improvement in 2023. As high interest rates and global economic slowdown persist, the road to recovery will remain bumpy and challenging in 2024, according to JLL's Year-End Property Market Review and Forecast released today.

Joseph Tsang, Chairman of JLL in Hong Kong, suggested that the government implemented seven measures to provide crucial support for the housing and land markets in order to prevent a detrimental impact on the economy.

Key points:

The total surrendered office spaces in the five major office markets dropped 27.2% y-o-yin 2023.

Overall Grade A office rents will drop 5 to 10% in 2024.

Some international retail brands are considering expanding their presence in the city.

Rents of High Street Shops will rise 5 to 10% next year while rents of prime shopping malls will climb 0 to 5% only.

Investment volumes involved corporate/occupier buyers increased by 1.05 times in the second half of 2023, compared to the first half of the year.

Retail properties will outperform the overall investment market and their capital values will rise 0 to 5% in 2024.

Mass residential prices will drop about 10% in 2024, but there is still a strong demand for Hong Kong Serviced Apartments.

The government should take action to support the housing market and prevent negative impacts on the economy from the price correction.

As of November, only 14.2% of the current fiscal year land premium revenue target was achieved.

Resume government land sales by application list to increase the likelihood of successful land sales and avoid damaging knock-on effects on the market.

Office Market

Office leasing market showed a moderate improvement in 2023, but at a slower than expected pace. The overall market experienced a positive net take-up in the second half of the year after the market recorded negative take-up in the first half. However, demand for Grade A offices remained subdued, leading to a 5.3% decrease in overall rents by the end of November. Tsimshatsui is the only submarket which saw rents staying firm due to limited availability of premium office spaces.

The vacancy rate of Grade A offices rose to 12.9% by the end of 2023, while Central’s vacancy rate increased to 9.9%. However, the total surrendered space contracted during recent years. The total surrendered office space in the five major office submarkets dropped 27.2% y-o-y to 552,000 sq ft (NFA) by the end of 2023, indicating an improvement in the downsizing trend among corporates.

The office demand from PRC firms gradually improved. In 2023, around 22% of the total leasing volume in Central was contributed by PRC tenants, compared to only about 6% recorded in 2022.

Furthermore, 57% of new lettings and expansions in 2023 were for spaces of 10,000 sq ft or smaller, compared to 39% in 2019. This indicated that the leasing market was primarily driven by small and medium-sized occupiers this year.

Looking ahead, Sam Gourlay, Head of Office Leasing Advisory, Hong Kong Island at JLL, said: We expect to see more large space transactions next year. With the completion of new and high-quality projects in 2023 and 2024, tenants in need of multiple floors will have a rare opportunity to choose from a diverse range of premium options. Anchor tenants can enjoy an expanded and significant rental discount compared to small-scale occupiers, along with greater flexibility than we have seen in previous cycles."

"2024 will remain a tenant market, driven by office upgrades to newer buildings that also meet sustainability needs. Overall Grade A office rents will drop 5 to 10% in 2024," he added.

JLL

Dec 2023

As many of the headwinds impacting Hong Kong’s property market in 2023 will continue into 2024, we remain bearish about the outlook for Hong Kong Island’s office market. New demand will be limited amid weak market sentiment.

The high vacancy rate continues to affect the office leasing market on Hong Kong Island, and rents keep falling. Given the significant amount of new supply in 2024, particularly in the CBD with approximately 1.2 million sq ft of new floorspace, we expect the vacancy in Central to further elevate to an unprecedented high level.

“Flight-to-quality” trend will continue, as occupiers capitalise on falling rents for office or location upgrades. However, given the global and local economic conditions, as well as the absence of positive news from Chinese mainland, office leasing demand is expected to remain subdued in 2024 in the absence of stimulus. We expect office demand to remain soft in 2024, and the overall rent on Hong Kong Island will fall by up to 3% for the whole year.

Knight Frank

Q4 2023

In Q3/2023, the Hong Kong Grade A office rents experienced a 2% decline. This can be attributed to shrinking demand in the market. However, it is worth noting that the vacancy rate also dropped by 0.4%. One of the factors contributing to this decline in vacancy is the imminent redevelopment of KITEC in Kowloon Bay, which has led to displacement demand as tenants seek alternative office spaces.

The market continues to be dominated by cost-saving moves, with landlords such as Wharf, Hysan, 3 Garden Road, and Hang Lung offering flexible leasing arrangements. These landlords are willing to provide capital expenditure for office units ranging from 2,000 sq ft to 4,000 sq ft. Moreover, these expenditures can be transferable to the next tenant, providing an attractive option for businesses seeking smaller office spaces. Some landlords are also assisting with renovation works, with the associated expenses being reflected in the monthly rent, typically adding HK$8 to HK$10 per sq ft.

While hardly a cost saving move, UBS previous committed to pre-lease 250,000 sq ft of XRL Topside Development in West Kowloon to consolidate their offices, currently mainly in Central, to this brand-new building on top of the high-speed rail. Most recently, it is reported that UBS would double the pre-committed spaces to 500,000 sq ft, or an entire tower of the four-block development, after its acquisition of Credit Suisse earlier this year. The actual relocation date is reported to be in phases after 2027, though.

The IPO pipeline remained worrying thin with Q3 registering only 14 deals with HK$6.8 billion fund raised, as the stock market continued to tumble with HSI declining by another 6% over the quarter, and transaction volume also continued to shrink, with the HK$47 billion transaction volume on Oct 4 the lowest in five years. With only HK$24.6 billion raised so far this year, 2023 bound to be the worst year for IPO since 2001, further

dampening the already grim prospect of investment banks.

Despite the overall decline in demand, certain sectors have shown resilience in the Hong Kong office leasing market. Quantitative trading firms, which are known for their ability to generate profits even in challenging market conditions, have contributed to the demand. These firms are not restricted by geography and can trade in various markets. In addition, high-end retail sectors such as watches and art-pieces have remained stable compared to other retail sectors. The demand from these sectors has provided some support to the office leasing market.

Recently, The Office for Attracting Strategic Enterprises (OASES) signed strategic enterprise partnership agreements with twenty enterprises from various innovative industries, including life and health technology, artificial intelligence and data science, financial technology, and advanced manufacturing and new-energy technology. While these partnerships hold promise, the expansion of office spaces and demand from the innovation and technology (I&T) sectors remain uncertain. The market requires more concrete policies, incentive programs, and establishment timelines before feeling the full impact of these initiatives.

The Hong Kong office leasing market faces several headwinds and negative factors that could potentially accelerate its decline. Factors such as high interest rates, geopolitical tensions, and financial stress among Mainland corporates pose challenges to the market. These factors may lead to a deeper decline in office rents than expected over the next few years.

Savills