Hong Kong Central's Grade A office rents to inch up 0-5% in 2017

Rents are now up to 3.3 times costlier than in non-core areas.

According to JLL, tenant decentralisation gathered pace in 2016 as the rental gap between core and non-core office areas widened to their largest levels in five years. Grade A office rents in Central are now, on average, up to 3.3 times higher than those in non-core areas. 

The move out of Central was highlighted by a couple of UK law firms relocating to Hong Kong East, a trend that had previously not been seen in the market. The market also saw several foreign banks downsize their footprints in Central. Outside of Central, insurers were among the most active taking on expansion as insurance premiums surged on the back of increasing demand from Mainland Chinese policyholders.

In Central, requirements from PRC financial services firms remained as the major driver of demand, accounting for about 44% of all new lettings (by floor area), up from 35% in 2015.

Here's more from JLL:

Beyond the all-important banking and finance sector, the leasing market also benefitted from the expansion of co-working space operators. US operator, WeWork, was the most notable new market entrant, leasing 105,400 sq ft across two locations in Wanchai/Causeway Bay. The appeal of co-working platforms led to a number of landlords reserving floors with an eye to accommodate operator requirements.

A steady pipeline of new construction has seen Kowloon East overtake Wanchai/Causeway By as the second largest Grade A office submarket in the city, in terms of stock. It also now has the highest vacancy rate (10.7%) among all key Grade A office submarkets. Though still at relatively low levels on Hong Kong Island, vacancy rates started to trend higher towards the latter part of the year as demand, in general, remained weak.

Sustained PRC demand in Central helped push rents up by 9.2% to HKD111.9 per sq ft through the first 11-months of 2016. Rents are now about 4% shy of the all-time highs set in 2008 just prior to the Global Financial Crisis. In contrast, increasing supply side pressure contributed to rents in Tsimshatsui and Kowloon East to retreat by 0.5% and 1.5%, respectively, through the first 11-months of the year.

Ben Dickinson, Head of Leasing at JLL, said: “The launch of Shenzhen-Hong Kong Stock Connect should further support demand from PRC financial services firms in Central. But we expect leasing demand will moderate in 2017 owing to the modest growth forecasted for the local economy. Net take-up is expected to amount to about 690,200 sq ft, compared with a net withdrawal in 2016. We expect Central to be the only submarket to record rental growth next year, in the range of 0-5%, on the back of a tight vacancy environment. All other office submarkets are expected to post declines with rents in Kowloon East, where vacancy is concentrated, under the greatest pressure.”