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Short-term uncertainties and long-term opportunities

Hong Kong Blog 1 1536x1040

Hong Kong’s commercial market is evolving on the back of local and regional factors, such as the US-China trade war, the ongoing local demonstrations, changes in the co-working sector, and declining rents. Now, with a shift in business sentiment and capital expenditure (CAPEX) being tightly scrutinized, tenants and businesses are taking a more cautious approach.

A shift towards Enterprise Solutions

The flexible workspace sector is one of particular interest, as the offerings between the co-working and traditional service operators merge to provide a service that includes full design-build, leasing, and space management through an enterprise solution. Portfolio landlords are also starting to offer a similar type of design-build and lease solution. Flexible workspace options are widely known in the market – making headlines in the past two years for their rapid expansion into the Hong Kong market and subsequent oversupply. As part of the enterprise solution many of these operators are now evolving their models to offer full bespoke packages, which can follow the occupiers’ brand guidelines and deliver an owned office rather than a space branded under the operators’ name. More and more, additional flexibility is being offered across all locations and buildings managed by a flexible workspace operator.

From some of the more traditional landlords we are seeing a more flexible approach to negotiations. Items such as CAPEX, which haven’t been heard in Hong Kong’s market for over five years, are now being selectively offered from some landlords as well as other incentives such as longer licence and rent-free periods, as well as other non-financial terms.

Effective rents across Central

On the financial side, Colliers is forecasting rents for Central to drop 13.1% in 2020 and for the overall market to decline by 7.8%. This is a great opportunity for occupiers – music to their ears, as they have had to endure high rents over the last 36 months. However, markets tend to be cyclical in nature, and past trends tend to reflect future trends. Over the last 15 years, in every year when there has been a double-digit drop in rents, there is a bounce back in the following year. A prominent example was in 2008-2009 when rents dropped by 45% and by 2010 rebounded by 48%.

On top of the decline in rents, 2020 will have limited new supply which could in fact restrict the downward pressure on rents. Second hand stock, especially in the co-working sector are the clouds on the horizon, which could push vacancy up to levels not seen since 2009.

The short-term uncertainty and long-term opportunity

Despite the current business sentiment, the fundamentals for Hong Kong are still strong - low unemployment, low vacancy, and limited new supply, and these short-term uncertainties should be seen as nothing more than long-term opportunities. The window of opportunity is currently open for tenants to secure increasingly favourable and more accommodating terms from both the traditional and flexible sectors through their enterprise solutions.

If you would like to know more about the current market, explore some of the long-term opportunities, or even to discuss how to secure better terms, feel free to get in touch – I’d be more than happy to sit down and talk over it.