Both Alex and Laurens recently joined the Hong Kong Office Services team as Senior Directors, providing tenant advisory services to local and multinational corporations across industries as well as consultations on real estate matters and requirements in Hong Kong.
Their roles involve formulating and implementing real estate strategies, lease negotiations and financial analysis for clients regarding new lettings, rent reviews, and lease renewal transactions, all while accelerating the success of our clients.
This month we've asked them to share some of their insights into the current office market trends and outlook...
What's the current market outlook?
Laurens Chan: Many companies in Hong Kong’s office market placed their expansion plans on hold during Q4 2018 as the overall business environment remained gloomy. Although the US-China trade tensions did not intensify, uncertain market conditions did persist, leading Hong Kong’s office market into a slow start in 2019.
The office supply in Central is growing due to the scaling back of some PRC companies, as well as the surrendered space and relocation of some financial institutions and professional services firms towards Island East. We expect the situation to be more noticeable in the second half of 2019 and Q1 of 2020. Hence, rents in Central are forecasted to drop by 3.8% in 2019. From another perspective, this could be a healthy correction following an over 40% growth since early 2015. Rents in other submarkets are likely to see positive rent growth in 2019.
Alex Lam: This year, tenants from all sectors are facing a dilemma in paying record high rents in the Hong Kong Island, especially in Central. As a result, we are seeing more finance and legal companies move their operations eastwards as a way to cut costs and consolidate their operations. Still, decentralisation didn't come about because of rising rents in Central, it was embraced through the completion of Grade A offices with high specifications in non-Central districts as well as the improved infrastructure and amenities among districts, like the completion of the Central-Wan Chai Bypass in January 2019.
The decentralisation trend towards Island East has been further supported by the migration of sizeable tenants from professional and financial services, MNCs such as Baker McKenzie, BNP Paribas, EY, Goldman Sachs, Freshfields, etc. It is confirmed that the Securities and Futures Commission is planning to move from Cheung Kong Center towards Hong Kong East, for which the impact could be enormous. At the same time, companies relocating to non- Central business districts will be able to conduct feasibility studies around new workplace concepts, such as activity-based workspaces, refitting their spaces with modern and flexible working environments, and wellness principles to better retain and attract talent.
On flexible workspaces...
Alex Lam: More and more, multinational corporates are adopting flexible workspace strategies, examples include HSBC who leased over 100 desks at The Great Room in One Taikoo Place and over 400 desks at WeWork in Tower 535, FWD Insurance taking up space in WeWork’s Cityplaza Three location, and Morgan Stanley working with WeWork to design and build a whole floor at the International Commerce Centre.
Throughout 2018 flexible workspace operators maintained their growth and momentum, expanding aggressively and leasing around 1 million sq ft of office space in the city – almost triple the take up of 2017, and approximately 350,000 sq ft – together with international operators, traditional serviced office operators and local operators. PRC operators, namely Atlas and KR Space, joined the battle to compete for space in 2018. Atlas leased 47,000 sq ft in The Gateway and KR Space committed 60,000 sq ft in Times Square.
However, due to a sluggish business environment, investors becoming more cautious, and operators still trying to find the right strategy i.e. expanding in the right locations, targeting the right end user and pricing, growth has slowed down. Examples include KR Space who withdrew from both One Hennessy and K11 Victoria Dockside, and have returned a portion of the space in Times Square. While WeWork notably did not complete several deals in which they had agreed non-binding terms. These two large operators scaling back has drawn concerns from landlords on whether the Hong Kong market can absorb the combined area of 2.6 million sq ft of flexible workspace in the current market situation. Longer term we expect growth to move forward, particularly in Grade A buildings with premium operators.
I would recommend typical office occupiers to consider flexible workspace carefully as one of their possible real estate solutions, there is an increasing range of choice and therefore occupiers should be able to secure the right type of space for their business, while leveraging flexibility.
On the GBA...
Laurens Chan: The Greater Bay Area will see the collaboration and integration of nine Southern Chinese cities (Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen and Zhaoqing) and the two special administrative regions (Hong Kong and Macau), allowing each area to make use of their comparative advantage to foster stronger economic growth and deepen cooperation.
The Greater Bay Area has many advantages in place. The area has two world-class financial hubs – Hong Kong and Shenzhen, as well as highly rated airports and seaports. The Belt and Road Initiative and the upcoming launches of large-scale infrastructure projects will expedite the flow of talent, capital and goods; lead to growth in high value-added industries; attract more corporations and bring abundant opportunities to the real estate market.
As industries within the GBA grow there will be a greater need for financial and business services, expertise that Hong Kong companies have in spades. Hong Kong’s established position as an entrepot between the east and west will allow it to assume the role as a ‘super connector’ between the GBA and the rest of the world. Hong Kong is also set to become an important office location for mainland Chinese companies looking to go global.
About Alex Lam
Alex has more than 20 years of experience in commercial leasing in Hong Kong and has worked across a wide spectrum of business sectors. His clients include companies such as: China Overseas, Chief Securities, Cathay United Bank, Appleby, Gallant, Mazars, China Shopping, Goldin Properties, Veolia Water, Allianz Insurance, and Sony Pictures. He has also been responsible for the marketing of 18 King Wah Road in North Point, W Square in Wan Chai, and 1063 King’s Road in Quarry Bay.
About Laurens Chan
Laurens comes with more than 18 years of experience in the Hong Kong office market. He has extensive experience in project leasing and has worked on projects such as the Nexxus Building, CCB Tower, and Tower 535. Some of his clients include Everbright Sun Hung Kai Company,
FXCM, Oriental Patron Financial Group, Prudential, Lu, Lai & Li Solicitors, Jimmy Choo, Swatch Group, among others.