SOURCE: Cushman & Wakefield

Cushman & Wakefield

April 06, 2017 06:59 ET

Decentralization in office market to continue

Local consumption supports retail rental growth in non-core areas

HONG KONG, CHINA--(Marketwired - Apr 6, 2017) -

  • Office absorption in all districts back in the black again, in big contrast to the market in 2016
  • The decentralization trend continued for multinational corporations with cost-saving concerns
  • Tsimshatsui and Central retail rents continue to be under pressure
  • A new wave of cinemas targets new business opportunities in non-core areas.

Cushman & Wakefield, a global leader in commercial real estate services, revealed all districts recorded positive office absorption during Q1 for the first time since Q4 2015. The robust leasing demand has led to another round of quarterly increases in office rents for most districts, especially in Greater Central, which would motivate more companies to decentralize. Meanwhile, a smaller drop in retail sales, a mild turnaround in tourist volumes and further stabilizing in some high street rents gave hints to better market prospects ahead.

The overall office net absorption in Hong Kong rose further to 416,288 sq ft in Q1 2017. With the exception of Hong Kong South, Q-o-Q net absorption rose in all districts and to a positive level. The keen leasing demand spilled to non-core sub-markets, as Q1 was characterized by some sizable decentralization transactions, such as BNP Paribas leasing 100,000 sq ft in Taikoo Place, and Freshfields Bruckhaus Deringer, a leading international law firm, leasing 43,000 sq ft in One Island East.

The solid leasing demand drove down the availability level for all districts, with Hong Kong East and Greater Central having the tightest availability at 3.5% and 3.6% respectively. In fact, availability in Prime Central was down to 2.8% this quarter, which was the lowest level since Q3 2008. Mr Andy Yuen, Cushman & Wakefield's Senior Director, Office Services -- Agency in Hong Kong, said, "The low availability in Central continues to lend support to its rental growth, and the pressure on companies' ability to remain in the CBD is bound to increase."

On the basis of the substantial absorption, the all-districts average rent rose by 0.8% Q-o-Q to HK$79.29 per sq ft per month. The increase was led by Hong Kong South where rents rose by 2.3%, followed by Greater Central (1.7%) and Wanchai/Causeway Bay (1.5%) respectively. Mr John Siu, Cushman & Wakefield's Managing Director, Hong Kong, commented, "Given the lack of significant new grade A supply in Greater Central in the coming four years, rental movement in Greater Central and Prime Central rose further as we expected, to HK$122.16 and HK$136.03 respectively, thanks to the strong demand by the banking and finance sector, especially by PRC companies. The growth in rents hinted at a quickened pace of decentralization of multinational corporations this quarter. After the banking and finance sector, traditional occupiers in Greater Central such as law firms and related service firms are also seriously considering options in sub-markets such as Hong Kong East. The decentralization trend is expected to continue this year."

There was no major improvement for the retail leasing market in Q1, but the year-on-year drop in retail sales during January and February was smaller than a year ago, with Medicines and Cosmetics, and Food, Alcohol and Tobacco recording growth in sales. Tourist arrivals improved recently, with January to February figures posting annual growth from a year ago. In particular the downward trend in Mainland tourists has reversed. Given the significance of Mainland tourists' spending, this helped contribute to a steadier outlook for the retail market.

High street rents in Causeway Bay have stabilized in Q1, while Mongkok rents even gained 0.2% Q-o-Q. Tsimshatsui and Central rents continued to drop by 1.4% and 3% respectively, and for the next two quarters all districts except Causeway Bay will be tested by further downward pressure, with possible rental declines by another 3-5%. In the non-core areas of Yuen Long and Tuen Mun, retail rents rose by 0.9% and 0.5% respectively.

Mr Kevin Lam, Cushman & Wakefield's Executive Director, Head of Business Space, Retail & Office Services -- Agency, Hong Kong, commented, "Rental trends have become quite stable in the core areas while the non-core areas still pose some gain, which reflects the strength of local consumption that focuses on basic goods and services. Compared with a year ago, there has been a shift in trade mix in the core areas where luxury goods stores gave way to more affordable goods shops."

Despite strong local consumption, F&B rents (non-ground floor space) in core areas continued to fall between 0.5% and 2.3% in Q1, with the biggest drop recorded in Causeway Bay. Mr Lam said, "This downward trend in centralized locations will continue, but not to the point of a significant drop in rents, as the demand from F&B operators to open new concept stores is still strong. They also actively target non-core areas to take advantage of lower rents and steady business prospects. Another example is the cinema sector which witnessed 15 transactions in the past year, including changing hands at current cinemas and space being converted to accommodate new cinemas. Most of these transactions fell in non-core areas where consumption is supported by the residential areas nearby. On the basis of a steady spending force, we expect the divergence in rental trends between the core and non-core areas will continue."

About Cushman & Wakefield
Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop and live. The firm's 43,000 employees in more than 60 countries provide deep local and global insights that create significant value for occupiers and investors around the world. Across Greater China, there are 20 offices servicing the local market. Cushman & Wakefield is among the largest commercial real estate services firms with revenues of US$5 billion across core services of agency leasing, asset services, capital markets, facility services, global occupier services, investment & asset management, project management, tenant representation and valuation & advisory. To learn more, please visit www.cushmanwakefield.cn or follow us on LinkedIn (https://www.linkedin.com/company/cushman-&-wakefield-greater-china

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