Everything you need to know now about Hong Kong’s office leasing market

Mainland office demand slowed whilst medical groups expanded in fringe Central.

As the impact of the pandemic’s fifth wave wanes and restrictions are lifted, more employees have returned to the workplace. 

With decision makers making their way back to offices, Savills saw more renewals and relocations taking place in Q2, with vacancy remaining more or less unchanged over the past three months, standing at 9.9% in June compared with 9.8% in March. 

Here’s more from Savills:

Stock market turbulence as well as sharp rises in interest rates in the US caused IPO and secondary listings volumes to crumble in the first half, with only US$2.1 billion raised up to May 19th posting a 90% decline compared with the same period last year, according to Refinitiv data. As such, Mainland sponsors were adversely affected, negatively impacting leasing demand, especially in core areas.

Cryptos and new economy companies, which have supported the office market over the past three to six months, have seen their fortunes disrupted by heavy value declines, with Bitcoin and Ethereum down by 75% and 80% from their respective highs in November last year to mid-June while more vulnerable cryptos such as Terra and Luna disappeared altogether in the recent downturn. As such, the sector’s demand for offices dwindled, and facing a raft of other external uncertainties, office rents continued to decline by 1.9% in Q2/2022. 

On a brighter note, medical groups have been expanding in fringe Central and other core business districts to cater for increasing healthcare demand and take advantage of the lower rents on offer. 

Even though Mainland office demand has slowed over the first half of 2022, we expect supportive measures from the Central government, both announced and planned, to gradually revive the appetite for space among Mainland financial institutions. The loosening of the quarantine requirement from 14 days to 7 days will inevitably increase flows of capital and people between Hong Kong and China, while other rumoured measures, such as allowing RMB settlement for Stock Connect programmes could help revive stock market volumes.

Take-up of new office supply has been slow but with some projects achieving close to 50% pre-commitment: the three office towers at 11 SKIES at the airport (around 550,000 sq ft), were reported to have half of the space pre-committed; meanwhile, CITIC Bank leased six floors (around 130,000 sq ft) in Two Taikoo Place, bringing its precommitment rate to around 25%. Other than these two buildings, other offices with an expected completion this year amounting to around 2.9 million sq ft, have not seen significant take-up to date. With many of them facing completion delays of at least six to nine months, we expect vacancy to start picking up again towards the end of this year / early next.

While rents are expected to decline further over the second half, older stock will face stronger headwinds from more modern new supply, greater ESG regulation (including green certification) and changing workplace demands which place a greater emphasis on, for example, health and wellbeing and better amenities. In 2022, over 25% of total Grade A stock was at least 30 years’ old, with average building ages highest in the core business districts of Tsim Sha Tsui, Mong Kok, Central and Wanchai / Causeway Bay. This all suggests that we will see a pick-up in retrofits and redevelopments of older stock over the next few years.