HK Office Rents To Fall 5-15% In 2021: JLL

HONG KONG – Property consultancy JLL foresees that rents across all office submarkets in the Chinese territory could fall by 5 to 10 percent year-on-year by 2021, reported Mingtiandi on Monday (21 December).

This is except for Tsim Sha Tsui, where office rents are expected to register a higher drop of 10 to 15 percent as older buildings in the district face stiffer competition from emerging commercial hubs in Hong Kong.

JLL noted that traditional business districts in the territory have seen larger rental declines this year as compared to decentralized areas as more tenants look for cheaper options.

The Central district posted the highest plunge of about 22.7 percent year-on-year to an average of HK$93.80 psf (US$12.10 psf). Compared to its peak during Q2 2019, rents there are down by 28 percent. On an annual basis, new leasing transactions in the district plummeted by around 39 percent in the fourth quarter of 2020.

Emerging Kowloon East, which attracted major tenants such as JP Morgan in recent years due to its newer office buildings, witnessed a lower decline of 10.5 percent, said the property consultancy.

Nonetheless, the sharp fall in office rents could encourage bargain-hunting companies to consider renting more office premises in the territory.

“Lower rents can increase the city’s competitiveness, potentially positioning Hong Kong as a more attractive location to conduct business,” said JLL’s Head of markets in Hong Kong, Alex Barnes.

“The secondary listings of [mainland Chinese] firms in Hong Kong and GBA Wealth Management Connect would attract more mainland financial institutions and related industries to set up offices in the city, which could help support office demand in the medium term,” he added.

Despite the Hong Kong government’s withdrawal of hefty taxes on commercial property deals, JLL expects that investment volume by value in the office property market could decline by an additional 10 to 15 percent next year.

“The abolition of the double stamp duty on non-residential property transactions is expected to provide a fresh impetus to investment activity, especially for stratified assets with relatively small consideration. But this would likely have limited impact on en bloc transactions as most of them are conducted via company share transfers,” said JLL’s Hong Kong Chairman Joseph Tsang.

Meanwhile, Cushman & Wakefield (C&W) estimated that the volume of office space rented out in the territory declined by 2 million sq ft this year, which is roughly similar with JLL’s findings.

Based on JLL’s estimates, the total vacancy rate in Hong Kong increased to 8.8 percent, the highest level since 2004. The amount of rented office space that was surrendered prematurely hit 1.6 million sq ft, the highest since 2001.

In comparison, C&W’s Q4 2020 data show that overall office vacancy level reached 12.1 percent, the highest since the Q1 2005. It said vacancy hit double digits across all of Hong Kong’s major commercial hubs during the fourth quarter, except for Hong Kong East, where the cheaper rents and new developments like One Taikoo Place by Swire Properties helped to attract multinational lessees.

“Net absorption is forecast to remain in negative territory, ranging from -650,000 sq ft to -700,000 sq ft as demand is set to remain weak in 2021. Despite the limited new supply scheduled for 2021, the 4.2 million sq ft in new supply from nine projects planned in 2022 is expected to continue to weigh on rentals,” said C&W’s Managing Director in Hong Kong, John Siu.

According to the property consultancy’s data, although Hong Kong East was more resilient than other Hong Kong commercial hubs, office rents within the vicinity of Taikoo and Quarry Bay still fell 12.7 percent so far this year, whereas overall office rents dropped 18.7 percent on average.

“Office rents will continue their downward trajectory as demand remains weak and availability rises. Large occupiers with leases expiring in 2022-2023 will seek to leverage against over 4 million sq ft of new Grade A supply completing in 2022,” noted C&W’s Head of office services in Hong Kong, Keith Hemshall.

As such, small tenants are expected to continue considering serviced offices to maintain versatility and avoid upfront expenditure, he said adding that capital values of Grade A offices in the territory slumped by an average of 20.5 percent this year.

Despite the bleak prospects of Hong Kong’s office market for 2021, the availability of a COVID-19 vaccine by next June could support the start of an office demand recovery, added C&W.