Net effective office rents on Hong Kong Island slip 0.4% in September

Central and Causeway Bay registered the steepest YTD decline.

Leasing momentum remained soft in the office market in September, with a low level of leasing activity. According to Knight Frank, overall net effective rents on Hong Kong Island continued to fall to HK$67.1 per sq ft, dropping 0.4% MoM or 3.4% year to date (YTD). Among the major submarkets, Central and Causeway Bay recorded the largest YTD decline of 5.6% and 5.8%, respectively. 

Here’s more from Knight Frank:

In the recent down market, flight-to-quality demand continued to grow, as occupiers seized the opportunity from falling rents for office upgrades or expansion in prime locations. Over the past month, there was some active movement from law firms, including relocations and office upgrades. A few Chinese law firms, in particular, have been actively seeking small- to medium-size office space in Central for expansion. 

Vacancy rates were patchy in submarkets. Driven by affordable rents and more small transactions taking place, office space in Wan Chai has been gradually filling up, driving down the vacancy rate from 10.6% in June to 9.8% in September. As a result, some owners started to firm up their asking rents, indicating early signs of bottoming out in Wan Chai. 

Office leasing demand is expected to remain subdued in the short term in the absence of any positive catalysts. Coupled with the existing high vacancy rate in some districts and abundant upcoming supply, we expect the downward rental trend to continue for the remainder of 2023.

Kowloon

Overall business sentiment remained weak in September, and leasing activity continued to slow down. The majority of leasing transactions were dominated by small offices of under 3,000 sq ft, with rents of HK$22 per sq ft or below. Electronics and engineering companies remained the core demand drivers during the month. 

However, there were still some transactions, with lessees taking an opportunistic approach to optimise size or upgrade office building quality. For instance, Hong Kong-based internet, communications and telecommunications company HKBN relocated from KITEC to The Quayside with a bigger floor plate and fit out of approximately 100,000 sq ft; and asset management and construction consultancy firm Currie & Brown relocated from Island Place Tower in North Point to Manulife Place for an office-quality upgrade. 

Looking ahead, given the present low rents, we expect office rents to remain stable for the rest of 2023 and the attention of the market to continue to be drawn to newer, quality office buildings.