HK Office Market To Be Hit By China’s Economic Woes

HONG KONG – China’s economic issues are expected to impact Hong Kong’s commercial property market, particularly the office segment, according to a commentary published on the South China Morning Post (SCMP) on Monday afternoon (4 October, SGT).

Nicholas Spiro, a partner at Lauressa Advisory, explained that companies from mainland China are a key driver of office space demand in Hong Kong. Thus, the problems they are facing are also expected to impact the city’s office leasing market.

“Just when the recovery in Hong Kong’s battered commercial real estate sector was gathering momentum, another menace threatens to undermine confidence in the occupier and investment markets,” he said.

These issues include Evergrande’s US$300 billion debt crisis. Given that it’s one of China’s biggest home builders, a messy winding down process could have huge ramifications to China’s broader economy and could lead to a sharper-than-expected economic slowdown.

“China’s economy has rapidly become a key source of anxiety in financial markets, not because of genuine fears that Evergrande’s woes will spark a crisis on the scale of the disaster that followed the 2008 collapse of Lehman Brothers, but because the risks to growth are multiplying,” noted Spiro.

Exacerbating the situation is the sharp slowdown in China’s residential property market, the ongoing energy supply shortage that’s affecting manufacturing, and intensifying regulatory crackdown. As such, there are now fears that China would record dismal GDP figures.

In fact, survey statistics published last week revealed that manufacturing activity in China last month dropped for the first time since the beginning of COVID-19 pandemic.

“For Hong Kong – the commercial real estate market in the Asia-Pacific whose performance and outlook are most reliant on what happens in China – the heightened risks on the mainland are the latest threat in a succession of headwinds that are weighing on leasing and investment activity,” Spiro elucidated.

He said that the significant deterioration in China’s economic situation comes at a crucial time for Hong Kong’s commercial property market.

Despite a deceleration in the pace of office rental contractions, Hong Kong is expected to remain as one of Asia’s worst-performing office markets this year, with rents of Grade A office space there forecasted to fall by another 6 to 8 percent this year, compared to rental growths in Seoul and Singapore, according to data from property consultancy CBRE.