Insurance sector remains kicking in Hong Kong's office leasing market

It's been powering demand despite slowing leasing momentum.

It has been observed that despite the overall slowing of the leasing momentum across Hong Kong, the insurance sector remains active in the office leasing market.

According to a release from CBRE, the sector has been and will continue to be a key driver of office demand, particularly in decentralized markets such as Kowloon East. Insurance activity has the potential to shield submarkets from experiencing greater supply side pressures as the completion of new office developments accelerate.

Rhodri James, Executive Director of Advisory & Transactions Services, CBRE Hong Kong said, “Banking and finance is undoubtedly a key driver of the market, but the importance of the insurance sector cannot be understated. The sector ranked fifth in number of transactions last year, and it was the second most active sector in terms of space leased.”

The insurance sector has long been a source of innovation in the market, both in terms of expanding into new areas and moving beyond traditional leasing deals, beginning with the Manulife purchase of the 500,000 sq. ft. West Tower of One Bay East in Kowloon East for self- use purposes.

Here's more from CBRE:

“We fully expect this trend to continue going forward as companies maintain a presence in key locations near client clusters but shift the bulk of operations to cheaper, modern, well connected office space. Tsim Sha Tsui, Wan Chai and Causeway Bay will remain a focus for front office activity, but we will see expansion into other areas, particularly in Kowloon as well as to a certain extent on Hong Kong Island,” added James.

Market transactions show no letup in the appetite for space from insurance entities. Prudential took 70,000 sq. ft. expansion space in Metroplaza (Kwai Chung), 30,000 sq. ft. in the Gateway Towers (TST) and 11,000 sq. ft. in Millennium City 2 (Kwun Tong) and still may not have fulfilled its requirements. On Hong Kong Island, FWD expanded by 26,000 sq. ft. in Devon House.

However, demand is not limited to these more established office nodes. AXA have renewed their leases on all occupied space in Kowloon East but it will also relocate approximately 50,000 sq. ft. from AXA Centre, Wan Chai to Vertical Square, Wong Chuk Hang.

The result of all this activity may be a softer impact on rental levels in decentralized areas. With larger occupiers already reviewing real estate strategies, some will undoubtedly relocate to new buildings, further establishing decentralized locations as consolidated office hubs.

While the delivery of new supply will have an initial impact on rents, increased vacancy is likely to dissipate through the market. Moreover, this is likely to be staggered as companies move over different time periods, therefore limiting the impact in any one area or at any one time. The outcome is likely to be an easing rather than a sudden drop in rents and a compression in rental bands across submarkets.

The Hong Kong office market is widely accepted to be moving into a period of relatively greater rental volatility. Many expect greater rental volatility to be more keenly felt in decentralized areas such as Kowloon East, driven by an increased supply.

It has also been argued that Central will hold up better on the back of Mainland Chinese demand from the financial services sector. However, while the latter may be true, conversely it may also encourage larger occupiers to consider cost effective alternatives in decentralized areas.

“Mainland entities are pushing up rents in Central. However, traditional larger occupiers don’t need to have mid and back office functions located in expensive core CBD buildings if there are more cost effective alternatives.

Therefore, we are quite likely to witness a new wave of decentralization from the sector in anticipation of upcoming lease expiries over the coming years. As such, the trends and drivers of more expensive submarkets and buildings will be a key to how decentralized rents progress,” commented James.