06 September 2017

According to the latest statistics by Rates & Valuation Department, Hong Kong office rents hit a new record high in June with Grade A office rents in Central having increased by 4.7% YTD, achieving new record highs for six consecutive months in 2017. With a high rent environment forcing numerous occupiers to consider more cost-effective locations, predominantly in Central & Admiralty, it provides an opportunity for business leaders to reconsider their CRE strategies. We are seeing various new strategies being considered by occupiers and the realisation of these initiatives.

Island East remains a popular cost-saving option for Hong Kong Island tenants, particularly in light of the new Central-Wanchai Bypass, as well as Swire’s upcoming development One Taikoo Place, both scheduled for completion by Q4 2018. Traditionally Quarry Bay has been regarded as a back-office destination by many, a district which offers dual benefits of costs reduction through splitting operations while remaining on Hong Kong Island. However, this mentality has shifted, as evidenced by the relocation news of Freshfields Bruckhaus Deringer, AllianceBernstein and BNP Paribas, who are all taking up space in Swire Properties’ Taikoo portfolio as their main offices. One Taikoo Place has seen a significant level of interest from larger occupiers, with two large occupiers confirming to take up space, and several more are currently in close negotiation.

Another brand new office building in Causeway Bay, Lee Gardens Three, with target completion date in Q3 2017, is also an alternative cost-saving option for tenants from Central & Admiralty, which has premium Grade A office specification and high efficiency layout. Several Banks like Maybank, Cathay United Bank and Bank SinoPac have confirmed to lease space upon completion of the building.

Slightly further afield, Wong Chuk Hang remains another viable option for cost-conscious tenants who wish to remain on the Island. Some of the notable transactions were AXA Insurance, Insurance Authority, HOK (Architecture firm) and Valentino (luxury retail brand). Due to the high rents environment across Central, hedge funds are also exploring decentralised locations such as Wong Chuk Hang and Cyberport, several commitments have been confirmed so far. However, vacancy declines rapidly due to consistent take-up of office space, therefore we expect to see continued rental hikes in the area.

While some occupiers are able to consider relocating to cost-saving districts such as Quarry Bay, Wong Chuk Hang and Kowloon East, others remain rooted in core districts because of the need to maintain close proximity to their client base. These occupiers are instead considering making changes to their workspace to increase efficiency, reduce footprint while adopt more innovative and inviting working environment. As a general rule, offices across Hong Kong tend to be anywhere between 40-50% underutilised. Therefore, when calculating Hong Kong’s floorplan as one of the most expensive office markets in the world, there is a huge drive to get more out of less.

For larger occupiers who split their operations over multiple locations, consolidation offers the opportunity to reduce footprint and increase efficiency – L’Oreal is a prime example who is currently looking to consolidate three locations into one. Re-stacking existing office space often requires temporary swing-space during its renovations – Hong Kong’s growing co-working sector comes into play here, offering fully fitted and furnished space under flexible lease terms, as well as the opportunity for users to network and collaborate. Flexible workspace providers, such as WeWork and NakedHub, are securing more office space while companies are beginning to accept and understand the values these providers bring in. Some companies are considering “Flex & Core” solution, a term coined by Colliers in which tenants take up ”core” space in a development for their fixed headcount and access a “flex” solution in the same development through a flexible workspace provider. For divisions or companies with a fluctuating headcount, flexible workspace provides a fully fitted solution with no CAPEX requirement, together with the flexibility of 3-12 months’ leases instead of the traditional 3-year term. Occupiers with headcounts ranging from 50 to 600 persons are adopting this strategy.

Some other strategies are also being explored by occupiers. For instance, some companies are looking at surrendering part of their space, or more drastically, looking to undertake an early surrender of their entire centralised office in order to cut cost. This has led to an increase in the number of relocations to fully fitted premises. With the ongoing high rents environment, low vacancy and limited supply on Hong Kong Island, Colliers expects more and more occupiers will seriously explore various new solutions in the future.