Hong Kong Office Leasing Market – First Quarter, 2016
Hong Kong Office Leasing Market – First Quarter, 2016
Grade A Office Market Summary
- Takeup of office space by PRC firms slowed down.
- New developments scheduled to complete in 2016 failed to ease shortage of large floor plate quality building. Rents on Hong Kong Island continued to go up.
- To ease tight supply, HKSAR government rezoned Queensway Plaza into commercial usage and included Murray Road Multi-storey carpark site in the Land Sale List
- Insurance groups continued to fill up large bulk spaces. Two of the largest transactions being Prudential leased approx. 69,000 sq.ft. in Kwai Chung and AXA Insurance leased approx. 63,000 sq.ft. in Wong Chuk Hang.
- Citigroup large scale relocation to self-owned headquarter in Kowloon East spared space in Dorset House to accommodate demand from Warwick House and Cornwall House tenants.
- In Kowloon East, landlords were under pressure to offer attractive rental as vacancy increased due to Hang Seng Bank and Manulife large scale relocation to their self-owned buildings.
- Affected by sluggish exports, we witnessed logistics/shipping companies relocated to Kowloon East for cost savings.
CBD (Central, Admiralty and Sheung Wan)
The demand stemmed from Shanghai-Hong Kong Stock Connect Scheme gradually slowed down over the last quarter. Despite softened demand, tight vacancy and shortage of large floor plate supply continued to drive up CBD rent, though at a much smaller pace of 3.7% compared to 4.8% in Q4 2015.
While PRC firms favoured prestigious core CBD location at premium rent, cost-conscious multinational corporations (MNCs) in particular banks and law firms tried to reduce cost by decentralising, consolidate operations or downsizing. We witnessed a number of sublease or break lease cases.
An example being Mizuho Bank consolidated its operations from Pacific Place, Charter House and The Gateway into a new development in Tsimshatsui. A law firm in Citibank Plaza will move to Hong Kong East, the first case among international law firms.
The scheduled completion of Shanghai Commercial Bank Tower and Chinachem Central One in 2016 offered approx. 4,366 sq.ft. and 2,400 sq.ft. offices per floor respectively. Finance firms were particularly keen. However, these development offered no relief to large floor plate demand in CBD.
To ease tight supply, HKSAR government rezoned Queensway Plaza into commercial usage with the potential to supply 1 million sq.ft.. In addition, Murray Road Multi-storey carpark site (IL 9051) was included in 2017 Land Sale List, which will offer 448,900 sq.ft. office space. This future development is expected to relief tight supply situation in CBD at the earliest by 2020/2021.
Causeway Bay & Wanchai
With availability in CBD tightening, companies with expansion requirements opted to relocate to Causeway Bay/Wanchai at discounted rent. Lower vacancy rates was recorded and rent went up by 3.1% this quarter.
In Causeway Bay, Manulife’s moved from Lee Garden One to self-owned headquarter in Kowloon Bay made way for tenants that required over 10,000 sq.ft floor plate. An example being Vistra Corporate Services consolidating its operations into two and a half floors in Lee Garden One. Consolidation has cost reduction benefit due to the elimination of duplicated supporting facilities. A listed PRC company, Shifang Group leased a high floor in Lee Garden One.
Causeway Bay being a stronghold of IT tech giants such as Google and Oracle attracted another US web tech company, Akamai Technologies to lease space in Hysan Place. An US co-working space operator, WeWork leased approx. 90,000 sq.ft. in Tower 535.
Wanchai remained a popular headquarter location among PRC listed conglomerates and securities firms.
BC Financial Group expanded from Hip Shing Hong Centre in Central to a whole floor 6,895 sq.ft. in Luk Kwok Building. Guotai Global Investments leased 4,935 sq.ft. in 28 Hennessey Road.
On the investment side, MassMutual Tower owned by Chinese Estates was purchased by Evergrande Real Estate Group at HK$12.5 billion, a record unit price of approx. HK$36,190 per sq.ft. A joint venture formed between China Everbright Limited and Everbright Real Estate Limited, acquired Dah Sing Financial Centre from SEA holdings at HK$10 billion, an unit price close to HK$25,000 per sq.ft.
Hong Kong East
Vacancy dropped to 1.7%, the lowest across the board. Rent increased by 1.3% this quarter.
Citigroup moving to self-owned headquarter in Kowloon East spared large pockets of space in Dorset House to accommodate tenants from Warwick House and Cornwall House, which are scheduled for demolition in 2016 and 2017 respectively.
L&O Architects, Wallem Shipping, British Telecomm and Nielson moved to Dorset House. QBE Insurance moved to Oxford House. Oxford University Press and Beckman Coulter left Swire Portfolio for One Kowloon and Landmark East in Kowloon East respectively.
Wong Chuk Hang
The presence of Lane Crawford in One Island South attracted various fashion groups moved into the area such as Stuart Weitzman, Farfetch.com, La Perla, etc.
With South Island Line launches at the end of 2016, Wong Chuk Hang will be less than 10 minutes away from Admiralty, which offers large tenant occupiers back office location alternative to Quarry Bay and Kowloon East.
AXA committed to approx. 63,000 sq.ft. in Vertical Square to capture attractive rental package before the area become accessible.
Apart from AXA, we noted that various insurance groups continued to take up large bulk spaces outside CBD. One of the largest transactions being Prudential leased approx. 69,000 sq.ft. in Metroplaza Tower 1 in Kwai Chung; Aviva Insurance leased approx. 32,000 sq.ft. in One Kowloon; AIA leased approx. 19,000 sq.ft. in The Gateway Tower 1, Tsimshatsui.
Kowloon East
Significant drop in exports prompted shipping/logistic sector to seek cost reduction through relocation. Hamburg Süd moved from Two IFC to AIA Tower Landmark East; Kuehne & Nagel moved from MassMutual Tower Wanchai to Manhattan Place.
While space is limited on Hong Kong Island, Kowloon becomes a tenant’s market. Hang Seng Bank and Manulife large scale relocation left Enterprise Square Five and Manulife Financial Centre with sizable vacancy. In addition, the completion of Goldin Financial Global Centre will add approx. 852,000 sq.ft. gross floor area into the area.
Landlord positions are weakened amid increasing vacancy. We witnessed that attractive rental package was offered.
Rent in Kowloon East adjusted downward by 1.2% this quarter. This downward trend will likely to persist in the second half of 2016.
Outlook
With the expected launch of Shenzhen-Hong Kong Stock Connect, we believe PRC finance firms will remain as main demand driver that support CBD rents in the second half of 2016. Existing vacancy and new supply in Central i.e. Chinachem Central One & Two will gradually be filled by finance sector.
With uncertain economic outlook and slower growth in China, MNCs are cutting headcount and cost. They try to avoid incurring CapEx unless relocation presents significant rent reduction throughout the lease term. Renewal or moving to surrendered fitted space is still preferred.
Nos. 14-30 King Wah Road is the only development that will offer over 10,000 sq.ft. gross floor area floor plate on Hong Kong Island from now to 1Q, 2017. The problem of large floor plate shortage in CBD (Central, Admiralty and Sheung Wan) remains. Existing high rent will inevitably continue to rise in the second half of 2016 until tenants are presented with alternatives at lower rent. For instance, K11 Office in Tsimshatsui is two MTR stations away from Central and has 26,900 sq.ft. gross area floor plate with full seaview. This will create real competition for buildings in CBD especially those that are currently asking for over $120 per sq.ft.
In 2017, Grade A office supply will peak. However, 90% of the total 2.4 million sq.ft. supply comes from Kowloon. The potential of cost savings and premium quality buildings in Kowloon will attract tenants that are not traditionally tied to the CBD. As major supply on Hong Kong Island such as Lee Garden Three (approx. 317,000 sq.ft.) and Somerset House Redevelopment (approx. 930,000 sq.ft.) scheduled to complete in 2018, rents are expected to eventually adjust downward across the board.
Major Grade A Office Supply 2017
| District | Development | Developer/Owner | Total Floor Area (NFA approx. sq.ft.) |
|---|---|---|---|
| Fortress Hill | Nos. 14-30 King Wah Road | Henderson | 256,100 |
| Tsimshatsui | K11 Office | New World | 282,600 |
| Kwun Tong | 180 Wai Yip Street | SHK & Wong’s | 383,400 |
| Kowloon Bay | 348 Kwun Tong Road | Mapletree | 532,000 |
| Kowloon Bay | NKIL 6312 | Swire | 511,000 |
| Kowloon Bay | NKIL 6311 | Pacific Investment | 233,100 |
| San Po Kong | 33 Tseuk Luk Street | SHK | 147,200 |
| Hunghom | One Harbourfront Extension | Cheung Kong Properties | 79,200 |