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High costs, diversified demand set the tone for the Hong Kong office market in 2018

By   /  December 6, 2017  /  Comments Off on High costs, diversified demand set the tone for the Hong Kong office market in 2018

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Source: Media Outreach
Headline: High costs, diversified demand set the tone for the Hong Kong office market in 2018
At HK$129.1 per month, Greater Central rents rose to a record high bythe end of 2017 due to robust demand and limited availabilityHigh rents in the CBD forged a re-balancing of demand, with MNCsrelocating to non-core areas and co-working players taking up large floorplates in various districts, while the expansion of PRC companies in GreaterCentral should support a rental growth of 7%-9% for the district in 2018Affordable luxury, athleisure and F&B will be key sectors to supporthigh street rents, for which a prospect of 0%-2% up for Causeway Bay andTsimshatsui can be expected in 2018.

HONG KONG, CHINA – Media OutReach – 6 December2017 – The Hong Kong office market saw anotherrecord breaking year in 2017, according to Cushman & Wakefield, as GreaterCentral rents topped global levels again with an annual increase of 7.5%, surpassingall other districts. The rental growth was supported by solid leasing demandfrom PRC companies which accounted for 54% of the new lettings (in terms oftotal size) transacted in Greater Central so far this year, quickening the paceof decentralization by companies wishing to stay cost-competitive. While theoffice leasing market was comparatively more upbeat, the retail leasing marketalso showed increasing signs of recovery thanks to a rebound in touristarrivals by 3.4% and sales of luxury goods by 5.6%. The rental correction forhigh street space in Hong Kong that started since 2014 is nearing an end inCauseway Bay, but Central is still expected to continue to come under pressuredue to a relatively higher vacancy rate there of 7.1%.

After a subdued 2016, office absorption was back in the black in2017, amounting to 617,300 sqft. Growth was led by submarkets such as GreaterCentral, Greater Tsimshatsui, Hong Kong South and Kowloon East. That marked alarge contrast to the negative take-up of 80,895 sqft witnessed in 2016.

This has been reflected in the solid leasing demand fromcorporations for Hong Kong’s office space. First and foremost the fight for primeoffice space in Greater Central has been dominated by PRC companies,represented by the likes of HNA Group (93,600 sqft), Industrial Bank (54,600sqft), CMB International (29,200 sqft) making headlines this year with theirsizeable leases in prime buildings. MrJohn Siu, Cushman & Wakefield’s Managing Director, Hong Kong, said,“The banking and finance sector was the driving force behind the surge inPrime Central rents, so much so that they reached their six-year record high atHK$143.6 in Q4 2017 — also a global record, according to our latestinternational survey. The substantial rental growth in Greater Central was alsoa result of low availability. By Q4 2017, the availability rate in GreaterCentral shrank from 3.9% in Q3 to 3.7%, which was the lowest level among allsubmarkets.”

Thus the growth in rents has continuedto add pressure on companies in Greater Central during 2017. Decentralizationbecame the trend for multinational corporations and companies to staycost-competitive by reducing rental overheads. From Magic Circle law firmFreshfields Bruckhaus Deringer to BNP Paribas, traditional Central tenants fromprofessional services to the banking and finance sectors are embracing non-coreareas such as Hong Kong East in this game-changing relocation trend. Mr Keith Hemshall, Cushman &Wakefield’s Executive Director, Head of Office Services, Hong Kong,commented, “Companies could meet their consolidation or expansionrequirements with larger floor plates available in Kowloon East, as shown bynumerous transactions which pushed the district’s absorption level to 76,700sqft surpassing all other submarkets in Q4. However, for traditional Centraltenants, Hong Kong East is a more viable alternative for relocation thanks toits proximity to Greater Central, improving highway connectivity (with thecompletion of the Central — Wanchai Bypass in 2019), new and high qualityoffice space and maturing F&B / retail supporting amenities. We expect morecompanies to ‘head east’ in 2018 as part of a cost saving and office upgradestrategy.”

The emerging co-working trend strengthened the demand for spaceand continued to raise the profile of key operators such as WeWork and Spaces. Mr Hemshall continued: “These global and regionaloperators have been actively expanding in both core and non-core officesubmarkets, leasing at least 105,900 sqft of Grade A office space and 166,400sqft of non-Grade A office requirements so far this year.” The drive fromcompanies seeking flexible lease terms and CapEx avoidance, as well aslandlords’ preference for a long term stable revenue stream, look set to ensurethe co-working sector remains a key force in office leasing during 2018.

Mr Siu commented, “PRCcompanies, decentralization and the co-working sector all contributed to theshaping and re-balancing of leasing demand in various submarkets. We expectthese factors to continue to underpin leasing demand and rental growth ingeneral, and in Greater Central in particular where the shortage of space willnot ease until 2022 when the new Murray Road car park redevelopment and PeelStreet/Graham Street development schemes totaling 565,500 sqft come on-line. A rental growth of 7%-9% is thusexpected for Greater Central in 2018.”

Hong Kong’s retail market has been in a prolonged rentalcorrection since 2014, but in 2017 the market has begun to witness somepositive signs. Including forecast figures for November-December, touristarrivals throughout 2017 posted y-o-y growth of 3.4%, led by the return ofMainland Chinese tourists which contributed to an annual growth of 4.1% byyear-end, contrasting with the y-o-y drop of 6.7% in late 2016. Sales ofjewelry & watches showed a V-shaped rebound with an annual growth of 5.6%over the level in 2016 (versus a y-o-y drop of 17.3% recorded in end of 2016).These are the main factors that supported the stabilizing of core rents,particularly in Causeway Bay and Tsimshatsui — the districts with the lowestvacancy at 2.6% and 2.4% respectively — where rents dropped between 0.5%-0.7%q-o-q in Q4. Central is again under the greatest pressure with a rentaldecrease of 3.4% and vacancy rate of 7.1%, the same as in Q3.

Worth noting is that rents in non-coreareas such as Yuen Long and Tuen Mun recorded mild growth of 1.3% and 1.1%respectively during 2017, reflecting the strength of local consumption thatfocuses on basic goods and services. However, with the upcoming changes in taxationon certain kinds of basic goods in the Mainland, it remains to be seen whatkind of impact this will have on the continued business growth of the non-coreareas.

Mr Kevin Lam, Cushman & Wakefield’s Executive Director, Head ofRetail Services, Hong Kong, said, “Although the rents in Causeway Bay and Tsimshatsui havecome down by around 50% from their peak in 2013, they remain Asia’s mostexpensive retail areas. On one hand retailers were in a better position innegotiations and the softening has helped enrich the variety of shops in thesecore locations, demonstrated by a shift from luxury to more affordable goodsand a rise in pop-up stores. On the other hand there has been an increasedpresence of PRC brands, overseas brands and F&B shops which are takingadvantage of the discounted rents to establish their names on Asia’s mostexpensive retail streets. In terms of trade mix, cosmetics, accessories andlifestyle products will remain the pillar sectors, while the increasinginterest towards the affordable luxury and the athleisure products are expectedto support a prospect of 0%-2% up for Causeway Bay and Tsimshatsui in 2018.”

Meanwhile, the F&B trade continuedto record steady growth in business but that has not translated into growth inF&B rents. Mr Lam explained,“F&B rents have been in decline by 2.4%-9.7% since peaking in mid-2016as the growth in business has been offset by a substantial rise in labor costs,which has limited the ability of F&B operators to expand. However, moreoperators and start-ups now eye the fringe of core retail areas such as Tin Hauin order to maximize the business potential. We expect F&B operators willremain cautious in expansion but many will attempt to gain a foothold with newconcept stores.”

About Cushman & Wakefield
Cushman & Wakefield is a leadingglobal real estate services firm that helps clients transform the way peoplework, shop, and live. Our 45,000 employees in more than 70 countries helpoccupiers and investors optimize the value of their real estate by combiningour global perspective and deep local knowledge with an impressive platform ofreal estate solutions.Across Greater China, there are 20 offices servicing the local market. Thecompany was named the top China real estate services firm in four categories ofOverall, Valuation, Agency/Letting and Research by Euromoney’s 2017 Survey.Cushman & Wakefield is among the largest commercial real estate servicesfirms with revenue of $6 billion across core services of agency leasing, assetservices, capital markets, facility services (C&W Services), globaloccupier services, investment & asset management (DTZ Investors), project& development services, tenant representation, and valuation &advisory. 2017 marks the 100-year anniversary of the Cushman & Wakefieldbrand. 100 years of taking our clients’ ideas and putting them into action. Tolearn more, visit www.cushwakecentennial.com, www.cushmanwakefield.com.hk or follow us on LinkedIn (https://www.linkedin.com/company/cushman-&-wakefield-greater-china)

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