Rental Slump In Hong Kong Leads To Wave Of Office Upgrades

HONG KONG – Amidst the Chinese territory’s rare office market downturn, businesses operating in Hong Kong are seizing the opportunity to upgrade to larger and better office space, reported Bloomberg on Wednesday (2 August, SGT).

Based on statistics from Jones Lang LaSalle (JLL), rents of Grade A offices in the city have fallen by 31 percent compared to their peak in 2019. According to real estate consultancy Colliers, this now makes previously pricey workspaces more accessible to many office tenants.

“Right now, we’ve got a lot of nice buildings, whereas in the past even if you wanted to get in you can’t get in. With Hong Kong’s overall vacancy at around 15 percent, it’s giving occupiers the opportunity to go in, look for better stuff at more affordable rental levels,” noted Chris Hui, Head of landlord representation at Colliers.

Market watchers said features of top-quality office properties include wellness facilities, ESG certifications, access to transport networks, a bigger office floor plate with more square footage for a single storey, and provisions including the latest air-conditioning systems.

Several businesses have already jumped in on the opportunity to upgrade their Hong Kong office space. ByteDance transferred to One IFC, Jefferies Financial Group moved from Cheung Kong Center to Two International Finance Centre, while law firm Stephenson Harwood relocated from United Centre in Admiralty to One Taikoo Place in Quarry Bay.

However, the flight-to-quality trend is negatively impacting commercial property landlords who own office buildings that are older or are situated in non-prime areas.

“We are seeing a clear divergence in office occupancy rates between top Central, overall Central, and non-Central areas, like Kowloon East,” noted Sam Wong, an analyst with Jefferies Hong Kong.

Within Hong Kong’s commercial heart, Central, Hongkong Land Holdings own several office properties more than 30 years old. For now, Central’s largest commercial property landlord is faring well with an office vacancy rate of about 6.2 percent versus 9.4 percent in Central as of June 2023. While its oldest office property, Prince’s Building, has an occupancy level of almost 100 percent, the office landlord invests up to US$100 million per year to upgrade its buildings in Central.

Longer-term though, Hongkong Land Holdings could face some pressure, forecasted Bloomberg Intelligence analyst Patrick Wong. While the landlord carried out asset enhancement works and its office properties in Central are linked by a footbridge, its office properties are still becoming outdated.

Refurbishing any of the property would lead to a loss of rental income when the market is already in a slump. That’s a tough balancing act for all office building owners.

“If demand is coming back, it’s easier to upgrade, but the situation we are facing is that demand is not coming yet,” added Henry Chin, Head of research for Asia Pacific at CBRE Group.