Specialising in office leasing in Hong Kong Island, Raymond Ho has over 12 years of experience in both tenant and landlord representation. His strengths include office consultancy project, full scope of office lease negotiations and investments.
What are the current Grade A office trends in Central?
RH: Hong Kong’s Grade A offices in Central have some of the world’s highest rents, well ahead of Beijing, London, and New York. An increasing demand from mainland Chinese companies, particularly from the finance and banking sectors, together with the sub-2% vacancy rate in Central, have continued to push up rents since last year. Close to 50% of all new lettings (in terms of floor area leased) in Central are now from mainland companies, who continue to set up operations and expand across the market. Demand has focused on the top end of the market, with buildings such as IFC1 and IFC2, as well as Exchange Square, where PRC firms can enjoy a full and unobstructed view of the harbor.
This strong growth has widened the rental gap between Central and other business districts in the area, the former which has already reached an average Grade A rent of HKD120 per sq ft, similar to record high levels set in 2008. With tight vacancies and rents on the rise, cost-conscious tenants, mainly the large MNC occupiers, are seeking out alternative options outside of Central. Relocating to other districts would be a huge cost saving alternative, for example, companies could save up to 50% on costs if they moved to Causeway Bay from Exchange Square while maintaining the same Grade A office standard, they could save more by simply moving out of IFC.
New Grade A supply is becoming available in several locations outside of central; One Hennessy in Wanchai, Lee Garden Three in Causeway Bay, and One Taikoo Place in Quarry Bay are a few examples. One location that has enjoyed strong interest has been Wong Chuk Hang, where the opening of the South Island MTR Line has led to the relocation of a number of tenants into high-quality supply office spaces.
The legal industry has been notable in leaving Central for less expensive rents and bigger and better quality office space, Following Freshfields Bruckhaus Deringer’s relocation to One Island East in Quarry Bay, Backer McKenzie confirmed five floors or 100,000 sq ft in One Taikoo Place, a 48-storey newly developed office tower by Swire Properties that will be completed in 2018. Simmons & Simmons will be doing a similar move in 2019. In the coming two years we’ll see if this sets off a decentralization trend in the legal sector as a way for law firms to stay financially competitive.
Most landlords in Central prefer more MNC clients, what are their retention strategies?
RH: Portfolio landlords in Central are very conscious of their office tenant mix, and although PRC companies still comprise a low percentage, many new enquiries are coming from them. With tenant decentralization gathering pace, and the legal sector now joining the banks and insurers in relocating out of Central, landlords are thinking harder than ever in ways to retain quality MNC tenants. In addition to offering more attractive rental packages, landlords are starting to invest in technologies such as tenant management applications to enhance the service delivery and experience of the occupiers. For example, a major landlord in Central has recently created a tenant application which offers restaurant reservations, last minute table cancellations, communal meeting rooms booking, etc. Landlords are becoming more creative and innovative nowadays, rather than simply acting as a space provider.
I do not see Kowloon East as a direct threat to Central since they attract different business segments.
For those MNC companies who cannot afford the rent in Central or core districts, what other options are out there?
RH: Hong Kong Island is still the preferred location for a majority of the MNC companies, whether it’s Central or another major business district on this side of Victoria Harbour. This is largely due to many of them having a large population of expatriates within the company, and their preference to live on the Island for ease of their social lives and their children’s schooling. For those MNC companies in Central who are seeking cost effective solutions, we‘re already seeing leasing activities in some of the major business districts outside of Central, e.g. Lee Garden Three in Causeway Bay (Immediately available; c.60% leased), One Taikoo Place in Quarry Bay (Q4 2018 completion; c.65% pre-leased), and South Island Place in Wong Chuk Hang (Q4 2018 completion; three negotiations underway). One Hennessy in Wanchai is projected to complete around Q1 2019, with pre-marketing commencing soon. I expect this will draw significant interest from Central tenants very shortly.
Grade A office floor area in Kowloon East will be surpassing the current stock of 22 million sq ft in Central, Admiralty, and Sheung Wan by 2026, do you see this as a threat to Central?
RH: I do not see Kowloon East as a direct threat to Central since they attract different business segments. PRC companies will remain and will continue to expand in Central. However, with the vacancy rate in major office submarkets remaining below three percent, larger requirements will likely be fulfilled in decentralized locations such as Kowloon East, where the ample availability of high-quality office space will continue to come to market in the next three years. I expect Kowloon East rents will be under pressure, drawing some of the traditional tenants away from Wanchai and Quarry Bay districts thereby increasing the vacancy rates of those districts. This may prompt Central tenants to decentralize as the rental gap widens.