Office rents on Hong Kong Island slip 0.3% in October

Central saw the biggest fall of 0.5%.

According to a Knight Frank report, office leasing momentum slowed further in Hong Kong amid poor market sentiment in October. Rents continued to fall in the light of shrinking leasing demand and a high vacancy rate. Overall rents on Hong Kong Island dropped by 0.3% MoM or 3.6% year to date (YTD) to HK$67 per sq ft in October. 

Among major submarkets, Central experienced the largest fall of 0.5% MoM or 6.1% YTD, while rents were relatively stable in other decentralised markets. 

Here’s more from Knight Frank:

Rents in Central were under great pressure given the high vacancy rate, which reached an unprecedented high of 10.4% in October. Leasing activity in Wan Chai and Causeway Bay, in contrast, continued to pick up, driving down the vacancy rate from 9.8% and 9.7% in September to 9.3% and 9.5%, respectively, in October. 

Despite Central’s lacklustre performance, leasing activity by the legal sector continued to gain steam. Legal firms and chambers that are mostly local or Mainland-based continued to increase their footprint in Central, driving leasing activity. These law firms were actively looking for office space for expansion or consolidation as more employees are required to return to the office after the pandemic. 

The high interest-rate environment and global uncertainties continued to weigh on demand for office space. For the foreseeable future, office leasing demand is expected to remain sluggish, leading to a low level of leasing activity and softer rents in most business districts. 

Kowloon

The leasing market in October was stagnant, as both tenants and landlords were still sitting on the sidelines amid mounting uncertainty about the business environment. As in September, the majority of the leasing transactions were 4,000 sq ft or less, with an average rent of HK$24 per sq ft. Electronics and insurance companies remained the core demand drivers. 

Renewals continue to dominate leasing activity, while new lettings and relocation transactions were limited. Tenants were generally inclined to renew their leases, as landlords are more willing to provide flexible leasing packages to retain and attract tenants. In some cases, the lease tenure can be flexibly adjusted to one to two years instead of the normal term of three years. 

In the near term, businesses are still expected to opt for cost savings and size optimization in their real estate strategies, and the flight-to-quality trend should persist in the Kowloon market. In the absence of strong demand drivers in the market, we expect leasing sentiment to remain weak, with more tenants tending to adopt a wait-and-see approach in their decision-making.