HONG KONG -- Demand for space in central Hong Kong's premium office towers has started to rebound even as the U.S. warns multinationals about heightened risks under the national security law imposed on the city by Beijing a year ago.
Analysts say that occupied office space in Hong Kong's central business district rose during the April-June quarter, the first net gain since mass anti-government protests erupted in the city two years ago.
"We are starting to see the bottom of the market," said Rosanna Tang, head of research for Hong Kong and the Greater Bay Area at real estate services company Colliers.
The renewed appetite for Central office space has been whetted by a near-30% fall in average rents over the past two years, eroding some of the attraction of new buildings in outlying areas like eastern Hong Kong Island.
After dropping 17.9% last year, rents in Central and the neighboring Admiralty area slid another 2.6% in the first half of 2021 to 103 Hong Kong dollars ($13.25) per sq. foot, according to Colliers data.
Though Central office rents remain the highest in Asia, credit-rating agency S&P Global signed a lease in April to move into a 22,000-sq. foot space in Hongkong Land's Exchange Square complex, home to the Hong Kong Stock Exchange. The American company had left Central in 2012 to move across Victoria Harbour to Tsim Sha Tsui.
Chinese private equity firm FountainVest Partners and U.S. fund manager Lexington Partners, meanwhile, moved to larger, more high-profile offices this year within Central, with both taking up space in Sun Hung Kai Properties' International Financial Centre, home to the Hong Kong Monetary Authority.
Space remains relatively plentiful in Central compared to pre-protest and COVID times. The district's vacancy rate now stands at 7.3%, compared to under 2% two years ago, according to real estate services company Cushman & Wakefield.
Hongkong Land, Central's top landlord and part of the Jardine Matheson group, will report its half-year results on July 29. Its Singapore-traded shares have rebounded this year to reach levels last seen in the early days of the COVID pandemic. Hang Lung Properties, another major Hong Kong office tower owner, will also update investors on July 29.
Many analysts believe rents are likely to still slip a bit further in the coming months, with consultancy JLL forecasting second-half average Central leasing costs will decline as much as 5%.
Noting that new buildings will be coming online in the district in the coming years, John Siu, Cushman's Hong Kong managing director, is guarded about prospects for a robust market rebound.
"Some companies are adopting new practices like desk sharing and flexible working style, which make large offices unnecessary," he said.
It is unclear if the U.S. warning on doing business in Hong Kong, issued by four federal agencies on July 16, will affect interest.
The advisory said that developments over the past year "undermine the legal and regulatory environment that is critical for individuals and businesses to operate freely and with legal certainty in Hong Kong" and "present clear operational, financial, legal, and reputational risks for multinational firms" such as the seizure of corporate and customer data.
Demand from Chinese financial companies, which helped drive Central rents to their 2019 peak, is likely to surge again once COVID controls on mainland travelers are relaxed and a new "Wealth Connect" program for cross-border financial products launches later this year, analysts say.
"We expect the office leasing demand will pick up quickly once quarantine requirements are loosened, especially from mainland Chinese companies," said Ada Fung, head of Hong Kong office, advisory and transaction services at CBRE, another real estate services company.