Pre-leasing in newly completed buildings drives increase in office absorption levels while rents show signs of peaking

• Office absorption in Q1 grew to 77,101 sq ft from negative territory in last quarter
• Amid the weak demand from PRC firms and co-working operators, rents in Greater Central were flat but were largely stable in other submarkets, supported by continued decentralization
• Retail locations on the Kowloon side are benefiting from the new transportation links and are forecast to see relatively strong rental growth this year.

HONG KONG, CHINA – Media OutReach – 10 April 2019 – Office absorption rose to 77,101 sq ft in Q1 from negative territory, supported by the realization of pre-commitments in two recent completions totalling 127,483 sq ft along with some easing in trade tensions between China and the U.S. Demand was heavily driven by relocation and consolidation requirements, with the insurance sector particularly active. However, rents in Greater Central which were flat in the quarter showed signs of beginning to peak, on the back of weak demand from PRC firms. In the retail leasing market, core retail areas in Kowloon are benefiting from new transportation infrastructure, which is funnelling visitor traffic into West Kowloon and Tsimshatsui, as noted by Cushman & Wakefield, a global leader in commercial real estate services.

The territory-wide net Grade A office absorption rose from a negative -11,744 sq ft in Q4 2018 to 77,101 sq ft in Q1, with more than 97,000 sq ft of the demand concentrating in Kowloon East and Greater Tsimshatsui, although part of it was offset by negative absorption in Wanchai/Causeway Bay due to regular return of space. Mr Keith Hemshall, Cushman & Wakefield’s Executive Director, Head of Office Services, Hong Kong, commented, “Kowloon East continued to attract relocation and consolidation requirements, and the insurance sector was a key driver of the demand. Meanwhile, a few financial services firms picked up pockets of space in Central, keeping absorption in positive territory despite a slowdown in growth by PRC and co-working firms in the sub-market.”

Healthy demand levels with limited availability in many submarkets led to minimal growth of 0.2% overall rents in Q1, while Prime Central rents softened with a 0.4% drop q-o-q. Mr John Siu, Cushman & Wakefield’s Managing Director, Hong Kong, said, “Greater Central rents were flat at HK$139.1 per sq ft per month while Prime Central was under pressure as demand from PRC firms remained weak. But with Greater Central’s availability rate edging lower to 5.1% (4.1% for prime Central buildings), the high rents are still sustainable due to the low availability. Looking forward to Q2, we expect financial companies, especially new players, will be more active in looking for space in Greater Central for a prestigious address, while companies with consolidation needs will continue to head to non-core areas such as Kowloon East which are able to meet large space requirements at lower rentals.”

Supported by the new transportation links to mainland China, average daily Mainland visitor arrivals grew by 19% y-o-y during the first two months of 2019 — the biggest y-o-y growth in five years — with a 21% rebound y-o-y in same-day visitor volume. This funneled more business to the retail areas in Kowloon in particular. Meanwhile, a growth in sales for cosmetics and medicines against the general drop in retail sales in the first two months supported the expansion of cosmetics shops in various locations. Due to the shifted spending pattern to non-discretionary retail, plus the improved business brought by increased visitors, Tsimshatsui and Mongkok recorded a bigger quarterly rental growth of 1.1% and 2.6% respectively, compared with 0.6% growth in Causeway Bay and a 1.6% drop in Central.

Improved business drove Tsimshatsui’s vacancy rate down to zero, the same level as in Causeway Bay. Mongkok’s vacancy also tightened to 5.5% while Central remained at 7.1% — the location with the highest vacancy. With respect to F&B rents, the pressure was on Causeway Bay as business growth there lagged behind Tsimshatsui and Mongkok, while operators continued to be challenged by a tight labor market. These factors have caused F&B rents in Causeway Bay to trend down by 3.8% q-o-q, the most significant decline among all core locations.

Mr Kevin Lam, Cushman & Wakefield’s Executive Director, Head of Retail Services, Hong Kong, said, “Despite a fall in retail sales in the first two months of the quarter, growing tourist volumes and a rebound in the Renminbi are expected to support the retail market in Hong Kong in general. The launch of the new transportation links to mainland China has brought clear benefits to sales in Tsimshatsui and Mongkok but less so on the Island side. If these trends continue, we can expect comparatively higher rental growth in Tsimshatsui and Mongkok than in Causeway Bay this year.”