Hong Kong Island office sector still mired in challenges 

Grade A office rents dropped by 5.2% in May.

According to a Knight Frank report, the office sector on Hong Kong Island continued to face challenges and grapple with dropping rents and increasing vacancies. The average Grade A office rent on Hong Kong Island weakened in May to HK$63.8 per sq ft, decreasing by 5.2% YoY and 1.1% YTD. 

Among all the submarkets, Central saw the biggest drop in rent, falling by 3.4% YTD. With limited new demand and soft market sentiment, the overall vacancy rate hit a record 12.3% in May. 

Here’s more from Knight Frank:

On a positive note, there was a resurgence in new office demand from some Chinese mainland businesses, inquiring about high-quality office space under 5,000 sq ft. And despite the financial sector’s generally dismal performance, there have been a few expansion examples involving foreign financial institutions. 

The recentralisation and flight-to-quality trends continued, as some occupiers grasped the opportunity from falling rents for office or location upgrades. For example, a publicly traded holding company expanded its office space in One Exchange Square with a 12,610 sq ft space. As tenants opt for upgrades, more tenants are focusing on new developments with better amenities. This has driven landlords to increasingly recognise the importance of providing amenities such as conference spaces, collaboration areas and gyms to attract tenants. 

Given the current state of the macroeconomy, we expect officeleasing demand to remain moderate in 2H 2024. As rents continue to fall in prime districts, we expect the average Grade-A office rent on Hong Kong Island to fall by 3% to 5% for the whole year. Against the backdrop of the weak office-leasing market, we also expect the office sales market to be dominated by end-users and private investors. We expect most private equity real estate funds and insurance capital to continue to adopt a wait-and-see approach in the short term.