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Where does Hong Kong SAR go from here?

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A look at the effect of the last 18 months on the office leasing market

As of 1 July 2019, rents in Central stood at an average of HK$150 sq. ft. with vacancy rates at circa 2% throughout the CBD - the highest level and lowest prolonged level on record, for rents and vacancy, respectively. Since this date, Hong Kong SAR’s property market has faced a series of unprecedented challenges including the US-China tensions, which could take another twist after the Presidential Inauguration this week; social unrest that occupied the city for the second half of 2019; and the ongoing influence of COVID-19 which has put stress on the entire global economy. It is not just the office leasing market though that has been significantly affected. Tourism, retail, unemployment within Hong Kong, have all been hit hard.

The direct impact on the office leasing market has seen rents across Hong Kong drop by 20% over an 18-month period from July 2019, with Central falling even further to around 23%. Vacancy in Central tripled to over 7%, with a double-digit vacancy percentage being seen throughout the Island, Kowloon and the New Territories. Net take-up across all districts sat at negative 1.5 million sq. ft. in December 2020, and this trend has continued for some time. Central has shown a record negative take-up for 10 consecutive quarters with seven out of the last nine being negative across the whole city. A significant and sustained lack of demand for new lettings, or expansion transactions, has counteracted Hong Kong’s historical lack of new supply.

Transaction volume - a measure of demand - has been increasingly low. New lettings on Hong Kong Island dropped 66% from Q3 2019 until the end of last year, with Kowloon transactions also dropping throughout the same period, albeit to only 29%..

With all this negativity surrounding the real estate market and Hong Kong in general, are there any shining lights or positive viewpoints to take?

In short, yes. Now is a very good time for occupiers to evaluate their real estate strategy and footprint. Being a tenant in Hong Kong, or looking to enter the Hong Kong market, now more than ever, has significant opportunities, especially when compared with the times of ‘prosperity’ over 18 months ago.

Over 1 million sq. ft. of space sits vacant in Central. This offers tenants significantly more options than ever before. Businesses looking at entry into the market, or firms already in Hong Kong, now have more options when looking at Central as a location, in what is a notoriously hard market to enter. The drop in rental prices offers flexibility for tenants, and with landlords willing to negotiate to attract the ‘right’ brands, the number of buildings available in certain price brackets has now increased. ‘Flight to quality’ is now more apparent too – companies with lease expiry this year have the option to relocate to ‘better’ buildings, often at the same price they are paying from leases agreed three years ago. Upgrading your building can further enhance workplace strategies if employee satisfaction and productivity are a priority.

‘Recentralisation’ (the movement of occupiers back to the CBD) is now apparent

A Central address has always been prestigious for Hong Kong based businesses. This has eroded slightly over the past few years with ‘decentralisation’, but with reduced rents in the CBD, companies could now consider a central location; decentralisation is still very much apparent, however. The appeal for non-Central locations is boosted by new and upcoming infrastructure projects and when combined with brand-new supply outside of Central, makes these districts very attractive. This competitive stock may keep the vacancy high and rents lower in the CBD, prolonging the window of opportunity for tenants to centrally re-locate.

Hong Kong as a gateway city

According to the Legatum Institute in 2020, Hong Kong performs incredibly well in Enterprise Conditions and Investment Environment. Combine this with the heavily spoken about Greater Bay Area (GBA) and Hong Kong is still forefront in locations in Asia.

Entry into Mainland China from Hong Kong has never been easier (current restrictions due to COVID-19 taken in account). The 26km High Speed Rail that connects Hong Kong directly with the Mainland’s 25,000km expanse of train network, coupled with the Shanghai-Hong Kong connect and Shenzhen-Hong Kong connect, means it is not only the transfer of human capital that is seamless, but financial capital moves freely as well.

With the announcement that the COVID-19 vaccine will become readily available in February this year, we should see some normality to the border crossing return. In July 2019, some 5.2 million visitors entered Hong Kong from global locations, compared with just 20,600, 12 months later. The opening of the border will see a large proportion of this, from the Mainland, return to Hong Kong and help drive economic recovery. Additionally, using Hong Kong as a springboard to create synergies with the GBA should be a priority to any company wishing to make the most of the Mainland market.

Hong Kong’s link to the Mainland economy cannot be understated. Relative to Mainland China, Hong Kong’s GDP has shrunk from just under 19% of the Mainland’s in 1997, to less than 3% in 2019, according to Reuters. Combine this with the rate of growth of each, and Hong Kong will shrink further in comparison. Mainland China’s economy has become an internally demand-driven market, from the predominantly export-driven market it once was. Foreign investment is no longer relied upon, and more and more, investment capital remains within the borders. The de-listing of some companies in the US may also add a further positive for Hong Kong with some of these businesses potentially looking at the SAR as an alternative.

The above describes a positive picture for Hong Kong and whilst, we do see this scene hopefully returning soon, office demand will continue to remain weak in the first half of 2021. A recovery of some description is expected in the second half of the year with the introduction of a COVID-19 vaccine, but time will tell, to what extent this occurs.

Whilst Singapore has offered itself as a very good alternative Asian location to Hong Kong, the potential benefits of Hong Kong remain attractive. Despite all the turbulence Hong Kong has been through in the last 18 months, Hong Kong is poised to be one of the first economies to see a strong post Covid-10 era recovery. Hong Kong, and businesses both here and wanting to enter, must look to the future.

Just like with the invention of the car engine, horse and cart drivers did not give up, they just adapted.


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Niall Rowark

Associate Director

Office Services

Hong Kong

• Extensive knowledge and experience in working on cross border real estate transactions and for large MNC's in Hong Kong. Managed financials, documentation and presentations with businesses across Asia, Europe and the US.
• Exceptional team player: excelled in several different team environments both in a sporting environment and in the work place
• Socially and academically intelligent: engaged with different cultures and clients in diverse environments enhanced by a strong academic background

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