Higher Central office supply looms as Chinese tenants pull out

Occupiers in the financial sector have also been exiting.

After a steady growth of over 40% since 2015, office rents in Hong Kong’s Central Business District (CBD) are expected to drop 3.8% in 2019 in response to the dismal market environment, according to Colliers International’s Asia Markets Outlook 2019 report.

Colliers attributes the rental decline to a projected increase in office supply in Central as a handful of Chinese occupiers scale back their presence and financial tenants surrender their space due to the weakening market environment.

Financial stocks have a 48% weighting in the HSI and financial tenants occupy 54% of premium office stock in the CBD, data from Colliers show. As a result, the office sectors of Hong Kong, along with Seoul are directly tied to the performance of the stock market unlike their regional peers Singapore and Shanghai where rents are relatively insulated from the market downturn.

Also read: Commercial investment market spirals downward as office and prime street shops take heavy hit

“Central is still the preferred location for the financial sector and multinational corporations,” Colliers International said. “On the other hand, rents in Kowloon East should benefit from active pre-leasing activities in 2018 and a lack of new supply in 2020.”

Meanwhile, CBD fringe areas Sheung Wan, Wanchai and Causeway Bay were observed as the most fluid markets in terms of tenants moving in and out of the area. The three areas, especially Wanchai, were also said to offer tenants a good combination of amenity and affordable rents.

“Wanchai offers large floorplates, easy accessibility and good business facilities,” the report highlighted. “It should stay popular for the next decade as transport links improve due to the completion of the Shatin to Central MTR Link, and as new supply appears in Wanchai North after the relocation of government offices.”

Also read: Here's why Wanchai offers a reprieve from Hong Kong's crowded CBD

For the logistics and industrial sector, investors in Hong Kong are reported to be eyeing industrial assets for conversion potential. Rents and prices for industrial and logistics properties in the country are predicted to grow 8.4% and 5.4% respectively, in 2019.

According to Colliers, the rent and price growth reflects the lack of new supply and the government’s revitalisation scheme which has in turn lowered the total industrial stock in Hong Kong. “In contrast to other markets, continuous conversion and redevelopment of industrial buildings for office, retail, residential and hotel use are the chief drivers of rent and capital value growth in the sector,” the firm added.

Meanwhile, high-street rents are expected to rise 2% YoY with retail sales projected to pick up 5-7% YoY. New retail supply is estimated to increase 1.26 million sqft in core districts, which Colliers revealed as between three to four times bigger compared to historic averages.

“Newly launched transport links in the Greater Bay Area of South China should continue to boost tourist arrivals,” Colliers added. “However, the slowdown in China’s economy may lower mainland tourists’ willingness to spend, particularly on luxury items.”