Prime Central Rents Rise by 5.3% in a Quarter
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In a review of the Hong Kong office and retail property markets today, DTZ/Cushman & Wakefield, a global leader in commercial real estate services, pointed out that office rents in core business districts continued to rise in Q1 2016, with Prime Central and Greater Central leading the pack with a surge of 5.3% and 4.3% quarter-on-quarter to HK$128.88 and HK$115.64 per sq ft per month respectively.
The continuous surge in Greater Central’s rentals was underpinned by the demand from Mainland Chinese financial companies, which accounted for 49% of the major new lease in terms of size in Greater Central. In fact, insurance and banking & finance companies remained the main drivers of new lease demand in Q1, accounting for 80% of the total size of all major new lease in the quarter.
The overall absorption at approximately 262,000 sq ft in Q1 was largely due to the purchase of One Harbour Gate (West Tower) in Hung Hom by China Life. Apart from this, most of the districts had negative absorption. Mr Andy Yuen, DTZ/Cushman & Wakefield’s Director of Office Agency in Hong Kong, noted, “The released stock in the core districts is evidence that the flight to premises with greater space and cost efficiency continued, as many companies relocated for consolidation purpose. This led to better absorption levels in non-core areas such as Hong Kong South and Kowloon West.”
In the face of high rents, this quarter some traditional Central tenants began to decentralize. For example, legal firm Ince & Co. has committed to move from Citibank Plaza in Central to One Island East in Quarry Bay, and Mizuho Financial Group from Chater House, Two Pacific Place and The Gateway to K11 office in Tsim Sha Tsui.
Mr John Siu, DTZ/Cushman & Wakefield’s Managing Director, Hong Kong, commented, “Although rental growth is expected to slow in Q2 due to corporations’ concern about the prospects of the global and China markets, the high rentals in Hong Kong is contributing to a growing gap between the city and some other key regional business centers. For example, between the CBD Grade A1 office rentals in Singapore and Hong Kong, there is a gap that grew from 37.0% in Q1 2015 to 54.3% in Q1 2016, and the difference in prime rentals2 was even bigger, from 29.9% in Q1 2015 to 57.3% in Q1 2016. This substantial gap is likely to affect MNCs’ decision to office location and might hurt Hong Kong’s competitiveness in the long run.”
“The overall absorption at approximately 262,000 sq ft in Q1 was largely due to the purchase of One Harbour Gate (West Tower) in Hung Hom by China Life.”
For the retail market, falling visitor volume – total volume in January and February declined by 13.6% year-on-year, Mainland tourist volume by 18% – and falling sales for all sectors of goods in January and February, led by jewelry and watches (down 24.2%) and electrical goods (down 26.7%), continued to undermine the rental level. Rent on high street, as indicated by general index, fell by another 5-7% quarter-on-quarter in Q1, with rentals in Causeway Bay falling by 51% from the peak level in 2013.
In addition, concerns of economic slowdown and social instability are prompting some retailers to seek earlier termination of their leases, in an attempt to save on rental expenses. Should this become a broader trend, the general high street rent could see another drop of 10-15% from the current level in this year.
Mr Kevin Lam, DTZ/Cushman & Wakefield’s Head of Business Space, Hong Kong, said, “Despite this, retailers are taking the opportunity of the falling rental level to re-enter the core retail areas. There are fashion, accessories, shoes, cosmetic companies taking up street frontage shops vacated by companies of luxury goods, as those trades are sustained by a broader base of demand.”
“Foreign brands are also benefitting from the more affordable rents to enter the Hong Kong market. Recently more Japanese and Korean brands from fashion, cosmetics, lifestyles to the food & beverage sector are aiming at the Hong Kong retail scene.”
Another positive development of the retail market is that rents for F&B venues maintained a gradual upward trend, rising by 0.3-1.0% quarter-on-quarter in Q1. Mr Lam commented, “Demand for F&B spaces remains keen, although for new F&B operators, they are more interested in upstairs venues of moderate size in the key retail areas instead of ground shops, as a way of better cost control.”
The successful merger of Cushman & Wakefield and DTZ closed September 1, 2015. The firm now operates under the iconic Cushman & Wakefield brand and has a new visual identity and logo that position the firm for the future and reflect its trusted global legacy and wider history. The new Cushman & Wakefield is led by Chairman & Chief Executive Officer Brett White and Global President Tod Lickerman. The company is majority owned by an investor group led by TPG, PAG, and OTPP.
Questions & Answers
Q.Which specific types of companies are driving the demand for new office leases in Hong Kong's core business districts?
Which specific types of companies are driving the demand for new office leases in Hong Kong's core business districts?
Insurance and banking and finance companies are the main drivers. They accounted for 80% of the total size of all major new leases in the first quarter of the year. Mainland Chinese financial companies were a significant factor in Greater Central.
Q.What is causing some traditional Central office tenants to relocate to non-core areas?
What is causing some traditional Central office tenants to relocate to non-core areas?
High rents are prompting some traditional Central tenants to decentralise. Companies are seeking premises with greater space and cost efficiency, often relocating for consolidation purposes. This has led to better absorption levels in non-core areas.
Q.How has the gap in Grade A1 office rentals between Hong Kong and Singapore changed over the last year?
How has the gap in Grade A1 office rentals between Hong Kong and Singapore changed over the last year?
The gap between CBD Grade A1 office rentals in Singapore and Hong Kong grew significantly. It increased from 37.0% in Q1 2015 to 54.3% in Q1 2016. The difference in prime rentals also widened considerably.
Q.Are there any positive trends for retailers in Hong Kong despite the overall rental decline?
Are there any positive trends for retailers in Hong Kong despite the overall rental decline?
Yes, falling rental levels are allowing fashion, accessories, shoes, and cosmetic companies to take over street frontage shops. Foreign brands, particularly Japanese and Korean ones, are also entering the Hong Kong market due to more affordable rents. F&B venue rents are also seeing a gradual upward trend.