,Hong Kong

This district recorded the biggest office rental decline in Hong Kong 

Rents in this area fell 5.6% in Q2.

A recent JLL report said overall market net effective rents in Hong Kong fell 2.9% q-o-q in 2Q21. Among the major submarkets, rents in Tsimshatsui recorded the biggest drop of 5.6%, while rents in Central slipped just 2%.

JLL added that capital values in the overall market fell by 2.7% q-o-q in 2Q21 and investment yields remained largely stable at 2.8%.

Here’s more from JLL:

Overall Grade A office net absorption was about -81,000 sq ft in 2Q21 despite improving gross leasing volume. The flight to quality was prevalent as some tenants decided to upgrade their office premises in the wake of the pandemic. For instance, food delivery company Foodpanda leased two floors (39,000 sq ft, GFA) at Times Square in Causeway Bay.

New lettings in Central increased by 39.4% q-o-q as there were some tenant movements within the submarket. Notably, China Life Franklin Asset Management leased a floor (13,900 sq ft, NFA) at One Exchange Square, relocating from Cheung Kong Center.

Future supply will be concentrated in decentralised districts

No Grade A office buildings were completed in 2Q21. Landmark South in Wong Chuk Hang is slated for completion in 4Q21, adding 168,000 sq ft to the Grade A office stock. There are around 4.8 million sq ft of Grade A office space, all of which in decentralised locations, expected to be delivered in 2022.

In May 2021, a commercial development site (IL 8945) at Caroline Hill Road, Causeway Bay was awarded to a Hysan/Chinachem 60/40 JV for HKD 19.8 billion. The accommodation value of HKD 18,374 per sq ft was about 15% higher than the upper-end of market expectations and 48% higher than the second highest bid.

Outlook: The market enters the last phase of the down cycle

As many tenants are still in cost-saving mode, rental decline is expected to extend into 2H21, albeit the rental drop would be moderate. Depending on the pace of economic recovery, the current down cycle could reach the bottom in the upcoming 12 months.

Capital values are forecast to drop further due to rental decline and high vacancy. As the global vaccination rollout provides better clarity on investment outlook, more investors would opt to enter the market before the tentative rebound.

Note: Hong Kong Office refers to Hong Kong's overall Grade A office market.

 

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Market yields are expected to see further compression for the remainder of the year.
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