Hong Kong’s Office Rents Stand Firm While Demand Slows

A drop off in demand for Hong Kong office space hasn’t managed to dent prices, as an acute lack of space still defines the world’s most expensive office market. 

The 35,300 square feet of space rented in the fourth quarter of 2018 was the lowest level of take up in six quarters, according to JLL data. The weakness is expected to continue amid increasing uncertainty around the city’s economic outlook.

But rents have, so far, yet to notice. Average office rents increased 8.1 percent year-on-year in the fourth quarter of last year, according to JLL. Rents are set to grow 0.5% across the market in 2019.

Looking elsewhere

With vacancy rates in traditional business districts such as Central remaining tight, and prices high, tenants have been opting to re-locate to more cost-effective locations. 

Approximately 1.3 million sq ft of office space was leased or committed in Hong Kong East in 2018, supported largely by tenants pre-committing to One Taikoo Place, the latest addition to the Taikoo Place portfolio in Quarry Bay.  

Shifting market dynamics

While rents have remained stable, they could soon start to slip. 

“With the uncertain economic outlook to weigh on office demand over the near-term, the market will face an uphill battle to backfill all of the estimated 2.4 million sq ft of office floor space that is set to return to the market in 2019,” says Denis Ma, Head of Research at JLL Hong Kong.

Kowloon East – fast emerging as an alternative office location – still offers corporates the greatest amount of vacant space. During Q1-Q3 2018, 1.38 million sq ft of grade-A offices were leased in the area.

Following the most recent round of US-China trade talks in mid-February, the US administration has indefinitely postponed hikes in tariffs on USD 200 billion worth of Chinese imports that were set to take effect on March 2.

The implications of a potential trade war goes beyond the office market. Last year, JLL predicted that prolonged tensions could lead to a 15 percent drop in Hong Kong house prices in 2019.

“Demand for office space will soften amid increasing uncertainty in the city’s economic outlook arising from a slowing mainland Chinese economy and US-China trade tensions,” says Ben Dickinson, Head of Agency Leasing at JLL Hong Kong.

“This weaker demand will put further pressure on vacancy rates and translate into slower rental growth.”

For more details, download our report: Hong Kong land supply: Don’t forget about office