Green shoots of recovery in Hong Kong’s office leasing market
While Hong Kong commercial outlook has been bleak and likely to stay uncertain in the short term, are there any green shoots of hope for the local office market?
Starting from mid-2019, Hong Kong has been experiencing prolonged uncertainty, first coming from social instability and followed by the COVID-19 pandemic. The situation seriously battered the local economy and mired the city in deep recession. Many corporates have adopted flexible working arrangements to adapt to social distancing requirements. At the same time, many sought options to reduce real estate cost in light of the uncertain outlook. As a result, leasing demand for offices has shrank over the past year alongside rising vacancy. Grade A office rents and capital values have already declined by about 20% from the peak. With the outlook expected to remain murky, JLL is forecasting rents to continue correcting in the next 12 months.
Despite the unprecedented outbreak and uncertainty surrounding the political and economic outlook, there are green shoots of recovery in the office market. At a start, we expect that further rental drop will moderate in the near to medium term as the current COVID-19 wave has be relatively contained. Furthermore, Hong Kong will remain a top global financial hub and the home of a top international stock exchange. The city should retain its reputation for ease of doing business and free trade, while the foundations that uphold its autonomy, including the one-country-two-systems arrangement and its own common law system, are unlikely to change.
Despite the implementation of the National Security Law in June 2020, inhibitions towards normal business and financial activities appear limited, if any. Being a part of China, Hong Kong carries a unique and special status that mainland cities do not enjoy. Capital is free to move in and out of the city despite recent threats of unilateral sanctions from the US. This is particularly important as a fully internationalised RMB is still years away, that renders HK the unique position in conducting RMB-related clearing businesses and transactions. The business potential and associated activities suggest that there will continue to be a need for financial institutions to seek accommodation in the city.
Another potential source of demand could come from PRC companies, especially given the increasing US-China tension. As more PRC firms will second-list on the Hong Kong Stock Exchange (HKEX), following the footsteps of Alibaba, JD.com and NetEase, it is plausible that some of them will establish offices in Hong Kong. As the matter of fact, Alibaba reportedly recently leased a whole floor at Times Square to expand their footprint. While these representative offices will initially be dedicated to addressing listing requirements and duties, which generally do not require a significance presence, more corporate functions such as business development, marketing, finance etc. may be placed here once the companies are more familiar with the local business environment. JLL estimates that between 40 and 50 US-listed PRC companies are eligible to be second-listed in Hong Kong.
Besides rising demand, COVID-19 has pushed a change in the requirements, which will potentially raise the standard of quality in office space. For instance, the pandemic has forced occupiers to review their workplace strategy, business continuity programme and disaster recovery sites. This has resulted in some firms either consolidating their offices or even downsize/surrender their space. There has been an emphasis on improving workplace wellbeing, including hygiene, incorporation of health and safety programmes and flexible work from home arrangements. On the landlords and developers’ side, there is an increasing awareness to continuously enhance building ecosystem through various ratings to build smart buildings ensuring space efficiency, increased productivity and sustainability, and reduced cost.
Overall, as history has shown time and again, the Hong Kong office market will continue to evolve as it adapts to changes in workplace requirements to accommodate long-term growth of the segment.