Art dealers, crypto firms, coworking spaces drive Hong Kong office demand

Christie’s took around 50,000 sq ft in The Henderson in late 2021.

Hong Kong’s office property sector saw robust demand from crypto, art dealers and coworking operators in Q4 2021, with some (muted) mainland activity still in evidence, mostly driven by SOEs. 

According to Savills, relocations are generally being hampered by rising fit-out costs (even as rents fall) and logistical challenges – furniture from Europe can take five to six months to arrive while in China, power shortages mean that factories are not operating at full capacity. 

Here’s more from Savills:

Dealing in crypto currencies was banned in China from September this year while the Hong Kong market remains lightly regulated and many crypto operators in this rapidly expanding sector are choosing the flexibility of co-working space. 

Coworking businesses themselves are benefiting from renewed interest and new sources of capital – TEC (US private equity group KKR and Singapore private equity group TIGA Investments), IWG (JV with Hysan Development to operate its 32 flexible workspaces in the GBA including Hong Kong), WeWorks (its Hong Kong and China operations are now owned by Trustbridge Partners, a Chinese equity firm). 

As WFH is still a grey area for many firms who do not yet know where the ideal office/home balance lies, taking temporary space while everyone decides seems sensible.

The art world seems to have come alive with major deals inked by Philips who have taken around 45,000 sq ft in M+ and Christie’s who took around 50,000 sq ft in The Henderson in Q3 this year. 

Such businesses intend to host their own auctions (rather than relying on the Convention and Exhibition Centre) and ground floor/low floor space with removable windows is therefore desirable. As art buying takes off in Hong Kong, it will be interesting to see how actively Non-Fungible Tokens are traded, maybe alongside crypto. 

An important demand variable in 2022 will be the porousness of the mainland border. At the time of writing, governments may relax numbers to 1,000 business travellers per day. Still not enough to make a significant difference - at their peak in 2018, 12,000 Mainland business travellers crossed every day. 

Another market uncertainty lies with Mainland developers in distress and their need to return space. Many are based in southern China and have offices here in Hong Kong. We believe that they currently occupy around 200,000 sq ft across several business districts. 

We have analysed major rental inflection points over the past two decades and discovered that whenever vacancy rates have risen above 5% to 6%, office rents tend to start heading down, which is what occurred with the latest rental decline when vacancy surpassed the 5%-mark in early 2020. With demand remaining uncertain and substantial availability (both current and upcoming) over the next two years, office rents therefore look set to continue to head south. 

We also find that office rents tend to rebound whenever vacancy rates decline for two consecutive quarters, and in our forecast model, this is most likely in 2024 at the earliest as demand resumes and available space is gradually taken up, indicating that any meaningful rental rebound will only occur two years from now.