Hong Kong Central office rents to decline by up to 8% this year

Whilst overall rents on Hong Kong Island are expected to fall by 3-5%.

Given the soft market sentiment, a report by Knight Frank said the Hong Kong Island market continued its downward rental trajectory. Overall net effective rents on Hong Kong Island fell 0.2% MoM, or 3% year-to-date (YTD), to HK$67.4 in August. 

According to the report, among major submarkets, Central/Admiralty experienced the largest rental decline of 4.4% YTD, while rates in the decentralised areas were relatively robust, with Wanchai/Causeway Bay and North Point/Quarry Bay dropping by 0.9% and 0.8% YTD, respectively. 

Here’s more from Knight Frank:

The flight-to-quality trend persisted. On the one hand, some companies from the finance sector took advantage of the favourable environment for tenants and lower rent levels to consolidate and upgrade their office space in prime locations. 

On the other hand, the decentralisation and downsizing trend continued, as tenants prioritised cost and operational optimisation. Some firms that were paying high rents surrendered or sublet their office space to reduce costs. 

The challenging outlook for the office leasing market on Hong Kong Island, coupled with the high vacancy rate, will continue to put pressure on Central Grade A office rents in the near term. 

Over 2023, we expect overall rents on Hong Kong Island to fall by 3% to 5%, though Central will likely have a larger decline of 5% to 8% for the whole year due to upcoming new supply. 

Kowloon

Leasing activity in August was moderate, with most movement related to reducing costs. As in July, the majority of the leasing transactions were dominated by small to medium-sized units of under 3,000 sq ft and rents of HK$22 per sq ft or below. Leasing activity from electronics and manufacturing companies was more active during the month. 

Relocation cases dominated the leasing market in August. Most of the relocation deals were recorded in Kowloon East. Size optimisation, consolidation and improved building quality remained the major reasons for relocation. 

A Japanese information technology and electronics company moved from Landmark East to Millennium City 1 for size optimisation. Another Japanese electronics company relocated to The Millennity in Kwun Tong from City Plaza to take advantage of improved building quality and location. 

Going forward, while some companies will continue to relocate to reduce costs, this will drive leasing demand, supporting stable rent levels for the rest of 2023.