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News Release


PRC demand drives Central’s Grade A office rents back to market peak

Growth of decentralised retail & office markets to gather momentum in the coming years

​​HONG KONG, JULY 3, 2017 – Sustained demand from PRC companies helped push Central's Grade A office rents back to record high levels in the first half of 2017, according to JLL's mid-year commercial property report released today. The widening rental gap between Central and other major business districts saw tenant decentralisation gather pace with the legal sector now also joining the banks and insurers in relocating out of Central.


Key points:

  • Rents in Central grew 3.6% to HKD116.4 per sq ft in the first half, returning to the same market peak level recorded in 2008.
  • The rental gap between Central and other business districts on Hong Kong Island has widened to as much as 58%, contributing to a greater number of MNCs seeking out more cost-effective options outside Central.
  • PRC companies remain as the most active tenants in Central's Grade A office market and will be key driver of growth over the next 20 years.
  • 6.6 million sq ft of new retail supply is slated for completion between 2017 and 2021, of which 77% will be located in decentralised shopping areas.
  • Lower retail rent is providing more choices for retailers.
  • Retail rents to bottom out this year, but a V-shape recovery is unlikely.
  • Most 3PLs still adopting a wait-and-see attitude towards leasing despite improvements in external trading volumes.
  • Demand at the top-end of the warehouse market remains subdued, rents to retreat 0-5% this year.
  • PRC investors accounted for just 7.6% of total office investment in the first half, down significantly from the 31% recorded in 2016.
  • JLL expects capital values of Grade A offices to go up 15-20% this year after a series of strong results in government land sales resetting pricing benchmarks in the office investment market. 


Office market

Rents in Central outperformed all other office markets in the first half of 2017, growing by 3.6% to HKD116.4 per sq ft. Rents are now on par with the record high levels set in 2008. Growth was led by sustained demand from PRC financial firms, which continued to expand and set up operations in the city. About 50% of all new lettings (in terms of floor area leased) in Central arose from PRC demand, an increase on the 45% recorded in 2016. With most of the PRC demand still concentrated in the top-end of the market, rents of Grade A1 offices in Central grew by a market leading 4.7% in the first half.

The stronger growth recorded in Central saw the rental gap between Central and other business districts on Hong Kong Island widen further. As at the end of the first half, the gap had widened to as much as 58%, compared with 56% a year ago. Despite ongoing tenant decentralization, we expect the rental gap to continue to broaden in the second half owing to the large amount of new supply being built in locations outside of Central.

The vacancy rate in overall market has dropped from 4.5% to 4.4% in the first half, while Central's vacancy rate stayed at a low level of 1.9%.

With vacancy remaining tight and rents on the rise, MNCs continued to seek out more cost-effective options outside Central. One location that has enjoyed strong tenant interest through the first half has been Wong Chuk Hang, where the opening of the new South Island MTR Line has led to a number of tenants relocating out of Central. Moreover, the completion of new high quality supply in non-core office areas will further encourage tenant decentralisation. About 2.2 million sq ft of Grade A office floor space will be completed this year, providing a greater offering of choices for tenants.

Ben Dickinson, Head of Agency Leasing at JLL in Hong Kong, said: "PRC companies have been the most active in Central's office market over the last two years. We believe that this just the start of a secular trend that will continue under China's Going Global Strategy,"

"With the vacancy rate in major office submarkets remaining below 3%, larger requirements will likely be fulfilled in decentralised locations where the ample availability of high-quality office space. A stronger-than-expected first half has prompted us to revise and upgrade our rental forecasts for Central from 0-5% to 5-10% this year. Overall, rents are still forecasted to grow 0-5%, but we still expect rents in Kowloon East to fall 10-15% owing to the high vacancy and large amount of new supply being completed in the market."

Retail Market

High street shop rents fell a further 6.4% in the first half and are now down 41.2% from their 2014 market peak, back to the rental level ten years ago. Rents in prime shopping centres also continued to soften, down 0.6% in 1H17. Lower rents along with improving inbound tourism and retail sales data, however, encouraged more retailers to re-enter the market. Moreover, we saw a notable uptick in leasing demand from overseas brands and F&B operators.

The delivery of new retail space is set to bring more opportunities to retailers. A total 6.6 million of new prime shopping centre supply is slated for completion between 2017 and 2021 with 77% of new supply located outside the city's traditional retailing areas. These areas have recorded the strongest growth in the number of households over the past 15 years, with the corresponding median household income rising by over 50% over the same period.  These decentralised areas will also be the fastest growing residential submarkets in the coming years, which should translate into higher footfalls.

Terence Chan, Head of Retail at JLL in Hong Kong, said: "We expect high street shop and prime shopping centre rents to decline in the range of 5-10% and 0-5%, respectively, in 2017. Although rents continued to soften through the first half, we expect they will bottom out in the second half of the year. A V-shape recovery for the market, however, remains unlikely due to structural changes in the retail market. On the other hand, lower rental levels should be able to attract more retailers back to the market while new supply will provide retailers with more options and opportunities."

Industrial Market

Demand in the warehouse market was largely driven by the manufacturers, retailers and trading companies expanding operations. Demand from 3PLs, on the other hand, accounted for just 13% of all new lettings despite improvements in the external trading environment.

Net take up moderated to 60,622 sq ft in the first half, compared to 211,729 sq ft in the second half of 2016. Strong leasing at Mapletree Logistics Hub Tsing Yi, which reached full occupancy during the first half, was offset by returning stock elsewhere in the market.

Against such a backdrop, warehouse rents edged down by 0.3% to HKD12.9 per sq ft in the first half.

Flatted factories and industrial/office (I/O) building rents edged higher, up 0.2% to HKD12.4 per sq ft and up 1.0% to HKD17.6 per sq ft, respectively, over the same period.

Ricky Lau, Head of Industrial at JLL in Hong Kong, said: "Although Hong Kong's external trading sector continues to show signs of improvement, 3PLs are adopting a wait-and-see attitude towards their warehousing needs. Although rents edged higher in the first half, tenants remain resistant to paying premium rents. Coupled with the delivery of new supply, we expect warehouse rents to remain under pressure and correct in the range of 0-5% this year."

Investment Market

The introduction of stricter capital controls last November led to a steep drop off in investment demand from PRC investors who accounted for only 7.6% of total investment volume in the office sector in the first half compared to 31% in 2016.

The total number of transactions over HKD 100 million increased by 51% y-o-y in the first half, though the corresponding total consideration was down 12.7% y-o-y. The office sector continued to attract the strongest levels of investment, accounting for 53% of total investment volume while retail and industrial accounted for 25% and 22%, respectively. Despite signs of softness emerging in some segments of the rental market, investor interest for offices remained largely intact, thanks in part to the tight vacancy environment and strong results achieved in the government land sales market.

The office sector recorded the strongest performance within the commercial and retail sector. Capital values of Grade A offices grew 10.4% in the first half. The office market in Central saw capital values surge after the sale of the Murray Road Car Park for a record AV of HKD 50,056 per sq ft; up 15.1% in the first half. Capital values of high street shops, however, continued to fall, down 7.0% in the first half. Outside of retail, property yields further tightened across commercial and industrial sectors in the first half even as the US Fed raised interest rates twice.

Denis Ma, Head of Research at JLL in Hong Kong, said: "We continue to see strong investor interest in the commercial property market despite yields remaining at very tight levels. The office sector continues to draw considerable interest from investors with most focusing on the tight vacancy environment in the city's core-area markets. We expect this to continue, especially as pre-leasing in upcoming new supply gathers pace and vacancy pressure diminishes. Interest in the retail sector is also building. With macro-demand drivers continuing to show sustained improvement, we expect a greater number of investors to enter the market ahead of the market recovery. All-in-all, we expect capital values of Grade A offices and warehouses to go up in the range of 15-20% and 5-10% respectively, in 2017 while those of high street shops to correct 5-10%."


Hong Kong Commercial Property Indicator - % Change

Sector  1H 2017

Full year of 2017


Central's Grade A officeRents+3.6%+5-10%
Capital Values+10.4%+15-20%

High Street Shops


Capital Values-7.0%-5-10%
Capital Values+3.6%+5-10%



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