Grade A office rents in Hong Kong down 7.6% for full-year 2022 | Real Estate Asia

Grade A office rents in Hong Kong down 7.6% for full-year 2022

Rents declined 2.3% in the final quarter of the year.

According to a recent Savills report, Hong Kong Grade A office rents slipped by another 2.3% in Q4/2022, with more moderate declines recorded in Kowloon East and Kowloon West (-1.5% and -1.6% respectively) while areas on Hong Kong Island such as Wanchai / Causeway Bay (-3.5%) and Island East (-3.3%) registered greater falls. 

“Rents tumbled by 7.6% over the full year of 2022, with Grade A office rents now 31.4% below their previous 2019-peak. Vacancy rates also increased to 10.4% from 9.9% a year ago, with vacant space standing at 6.6 million sq ft net at the end of 2022,” the report said.

Here’s more from Savills:

Of the 3.8 million sq ft net of Grade A office completions in 2022, only 19% has so far been pre-committed, adding 3.1 million sq ft net of vacant space to the market in 2023, on top of the 1.9 million sq ft of scheduled completions. The total volume of vacant space may amount to 9.78 million sq ft at the end of 2023, representing a vacancy rate of 14.2%, if we assume take-up to rebound to 1.3 million sq ft for the year, the annual average from 2011 to 2019. 

Some new office supply, originally scheduled for 2023, will see completion pushed back by six to nine months as COVID has hit both the supply chains for materials and construction schedules, partially alleviating the space overhang from 2022. 

Meanwhile, many of the upcoming office buildings are equipped with innovative and green features catering to the future needs of corporates. While most of them will be pre-qualified with BEAM, LEED and WELL certifications, many will arrive with green, wellness and energy saving features such as landscaped gardens, wellness plazas, air quality control systems, smart building management systems and even rooftop solar panels. 

Most significant deals done over the quarter were multi-floor pre-lettings of newly completed / to be completed Grade A offices in both the CBD and decentralised areas. The highest profile was the UBS precommitment to 250,000 sq ft (nine floors) of SHKP’s XRL Topside development, to which the Swiss bank will be relocating their IFC offices from 2026 onwards. Other new offices in decentralised areas continued to be favoured by MNCs as cost saving relocation options. 

The recent stock market resilience has helped sustained financial-related office demand: while the Hang Seng Index crashed to its lowest at 14,700 in October, the market rebounded over the last two months of the year to reach 19,800 by the end of December. Coupled with the proposed Mainland border reopening in early 2023, some wealth management firms and insurance companies are already framing expansion plans to cater for the anticipated influx of Mainland capital. 

The rebounding stock market, a loosening of most COVID-related measures as well as the scheduled border reopening with the Mainland are all positive spins for office demand, but uncertainties remain for 2023 with hangover vacancies from 2022 completions, as well as lingering doubts over the speed of recovery of both the local and Mainland economies. We expect office rents to continue to decline by 10% in 2023 as a result, with areas expecting more upcoming supply (and overhang vacancy) likely to see deeper rental discounts even as take-up improves. 

With stock market volatility for most of 2022, the IPO market was adversely impacted with only 90 new listings raising around HK$105 billion, a marked 68% decline from 2021 in terms of funds raised. Nevertheless, with China moving away from its zero-COVID policy, and both Hong Kong and China’s economies expected to recover from 2023, the stock market is likely to revive favouring a return of IPO listings, with funds raised forecast to rebound by 72% to reach HK$180 billion on the back of new listing rules enabling pre-profit specialist technology companies to list in Hong Kong. 

Such movements should benefit investment banks and asset management firms (mainly PRC), pushing them into expansion mode after several years of stalemate.

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