Ageing HK Office Bldgs May Lose US$1.3bil In Rental Value

Ageing HK Office Bldgs May Lose US$1.3bil In Rental Value

HONG KONG – After Jones Lang LaSalle (JLL) revealed in March that there are at least 100 ageing office towers that need to be renovated to unlock their rental potential, the property consultancy has just disclosed that office landlords there could lose a huge amount of rental value if they fail to refurbish their commercial properties.

In a report by the South China Morning Post (SCMP) on Wednesday morning (5 May, SGT), JLL shared that over 50 percent of Hong Kong’s Grade A & Grade B office buildings are deemed as ageing as they were completed over 2 decades ago. And their office rents are lower by 10 percent to 40 percent compared to their newer and well-maintained counterparts.

Given that less than 25 percent of such office buildings were upgraded over the past 10 years, the remaining un-upgraded properties could lose a total rental value of over HK$10 billion (US$1.3 billion) if they don’t get refurbished.

“Many existing buildings no longer yield the same value as before the pandemic,” noted JLL Asia Pacific’s Head of asset development, Andrew Macpherson.

“The situation will be made worse when new buildings – that have been designed to meet post-pandemic value drivers of health, wellness and sustainability, human experience and technology – enter the market over the next 2 to 3 years.”

The property consultancy said priority renovation works in office towers should include provision of wellness facilities, access to outdoor space, enhancements to air quality, and design that allows entry of natural light. Another vital one is making use of proptech solutions to comply with social distancing rules & to support de-densification.

Good thing, some office lessors in Hong Kong are carrying out major upgrading works. For instance, The Hong Kong Club in Central is undergoing a refurbishment that includes a replacement of the vintage 1984 building’s façade. The 1991-built China Everbright Centre in Wan Chai is also undergoing improvements.

While upgrading works are costly, it does help raise rental values. For instance, Lee Garden Three in Causeway Bay was redeveloped in 2017, and it presently command office rents ranging from HK$50 psf to HK$60 psf. In comparison, rents at the nearby Leighton Centre is only about HK$45 psf to HK$48 psf.

If Leighton Centre, which was constructed in 1977, undergoes renovations such as a lobby makeover and make changes to its elevators, office rents there will likely increase by 10 percent to 15 percent, estimated Leo Cheung, Executive Director of surveying firm Pruden Holdings.

He shared that property owners usually favour refurbishment over redevelopment, as the former is faster to complete and is about 33 percent less expensive than a redevelopment.

“Demolishing the whole building and replacing it with a smart office with high ceilings and raised floors will definitely achieve higher rents. But it will take about 4 to 5 years to complete, which means no rental income during redevelopment,” explained Cheung.

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