Should RMB depreciation worry office landlords?

Depreciation is a headwind in other markets.

It has been observed that a weaker RMB, on the surface, should not meaningfully impact either office rent or capital value.

According to a research note from Bank of America Merrill Lynch, while PRC institutions have occasionally been buyers of large office properties, the strata title markets are dominated by local and property fund investors.

As such, a diminished purchasing power on the part of PRC institutions may not necessarily lead to higher cap rates. Meanwhile, a weaker RMB should not deter PRC financial institutions from setting up or expanding offices in HK.

Here's more from Bank of America Merrill Lynch:

Multinationals picking regional or Greater China headquarter offices may take into account the exchange rate, but office cost is likely to be one of the many factors considered (e.g., information transparency, legal system, availability of talent).

As such, we believe the impact of a weaker RMB on the HK office market may be mostly indirect in nature – e.g., if the HK economy weakens owing to the continued retail slowdown. Our regression analysis shows that HK office rent growth is highly correlated with (correlation coefficient of 0.8) HK's GDP growth.

Every 1ppt change in real GDP growth would result in a 5-6ppt change in real office rent growth. That said, our simple linear regression model does not take into account other physical market factors, such as office vacancy, which make the regression results more a directional indication than a comprehensive set of estimates.