Greater Central office availability reaches a 15-year high
- Grade Aoffice rental declined for the fifth consecutive quarter with Greater Centralrents down by 7.5% quarter-on-quarter, the steepest drop among all submarkets
- Rental declines accelerated withCauseway Bay rents falling by25% in the quarter; Outlook may improve inthe second half with rents forecasted to begin to stabilize, depending on the situation of the local outbreak
HONG KONG, CHINA - MediaOutReach - 7 July 2020- Rental declines accelerated in Q2 in both the office and retail leasing markets,and that overall availability of Grade A office space rising to 10.7% meansoffice rents will be under further pressure in the second half of the year. Onthe retail side, a more stable retail leasing landscape in Tsimshatsui helpedboost the prospects there, which has overtaken Causeway Bay in terms of retailrents for the first time, according to Cushman & Wakefield, a leadingglobal real estate services firm, in its review of the Hong Kong office andretail leasing markets today.
In Q2, net absorption in the overall Grade A officemarket remained in negative territory at -513,510 sq ft, as compared to-524,947 sq ft in Q1. With COVID-19 and the worsening economic outlook continuingto weigh on the market, the quarter saw a growing number of firms surrenderspace, especially within retail, tourist-related, financial and co-working sectors,all hard hit by the pandemic.
Mr Keith Hemshall, Cushman & Wakefield's ExecutiveDirector, Head of Office Services, Hong Kong, commented, "Office space take up isexpected to continue to contract, leading to approximately 1.5 million sq ft ofnegative absorption for 2020, as corporates reduce headcount and shelveexpansion plans. In addition, the formalization of 'work from home' initiativesfor a proportion of staff is currently being closely evaluated as a cost savingand business risk management strategy, although the degree of itsimplementation has yet to be seen and will vary according to industry sector.Given the rising importance of wellness in the workplace post COVID-19, some ofthe space freed up by such initiatives may be left vacant to reduce headcountdensity and increase social distancing but cost pressures should ensure aproportion will be handed back to the market."
The overall availability edged up further from 10.0%in Q1 to 10.7% in Q2, the highest level in 15 years. Rents remained on thedownward trend, with Greater Central down by 7.5% from Q1, while Hong Kong Eastrecorded the smallest decline among all submarkets, by 2.7% on the quarter.
Mr John Siu, Cushman& Wakefield's Managing Director, Hong Kong, commented, "With overallavailability increasing, landlords are offering a more diverse range ofincentives to generate demand for vacant premises or to retain existingtenants. For new tenants, longer rent-free periods, partial subsidy for fit-outs,stepped rental packages, flexible rights to break or sub-let space and bumperfees for introducing agents are all being seen. For existing tenants, we areseeing landlords agreeing to early lease restructures or renewals at less thanthe passing rent, often with rent free being provided to lower the effectiverent."
"As surrenderstock increases, we expect overall availability to reach approximately 12% bythe end of 2020, depressing overall grade A rents by another 8% in the secondhalf of the year. Greater Central rents are expected to decline by up to 20%for the full year."
The retail market remained in the grip of the COVID-19 pandemic inQ2 as border closures and travel restrictions brought tourism to a virtual halt.Mainland visitor arrivals volume dropped 99% year-on-year to a total of 13,446in Q2. Retail sales in May, at HK$26.8 billion, were down32.8% year-on-year, led by declines in jewelry & watches (69.7%) and medicine& cosmetics (62.0%).
Rents in Causeway Bay continued to be heavily impacted by astruggling luxury sector. With the biggest quarterly drop among all submarkets,by 25% to HK$969 per sq ft per month, the current level represents a drop of 46%year-on-year and of 76% from the peak in Q4 2013. The decline also meant thatTsimshatsui, with rents at HK$1,018 per sq ft per month, surpassed Causeway Bayas the most expensive retail district in Hong Kong for the first time.
Mr Kevin Lam, Cushman & Wakefield's Executive Director, Headof Retail Services, Hong Kong,commented, "The retreat of luxury will push the vacancy rate (7.9%) inCauseway Bay further up this year. Incoming, non-luxury tenants are likely todrag down the rents along a shift in the tenant mix. On the other hand,Tsimshatsui's rents will be more sustainable because the retail landscape thereis owned by and has the support of several major developers. The differenttrade mix there and in Mongkok also means rents of these core submarkets willbe more resilient than those of Causeway Bay and Central."
F&B rents saw a quarterly drop of around 15% for the coresubmarkets in Q2, but have stabilized towards the end of the quarter followingthe easing of social distancing measures in restaurants and bars in May. Although F&B sales would be down by 47%year-on-year based on our Q2 projection, the sector's performance reflected abase demand that consisted of largely local consumption. With the growthmomentum shifting to F&B, the sector could be close to bottoming out inboth sales and rents.
Mr Lam said, "Amidthe ongoing pandemic and rising unemployment rate, the prospects of high streetretail remain challenging. Non-discretionary retail, pop-up shops, shoppingmalls with an organized promotional effort and more supporting elements fortenants, will be among the emerging trends in the coming quarters. In thisregard, we expect shopping mall rents to be more stable than those on highstreets in the second half, where it is expected to be slightly downward orstable at best for Causeway Bay and Central, while Tsimshatsui and Mongkok canlook to rentals to possibly edge slightly upwards."
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