July 4, 2017 9:36 pm JST

Central Hong Kong top grade office rents reach all-time high

Mainland Chinese companies accounted for 85% of major new leases in Q2

JENNIFER LO, Nikkei staff writer

Grade-A office rent in Hong Kong's Central district has reached a record high as mainland companies flocked to the territory. (Photo by Nozomu Ogawa)

HONG KONG -- Robust demand from mainland Chinese companies is driving office rents in Hong Kong's central business districts to surpass the 2008 market peak before the global financial crisis hit the territory, said property consultancy Cushman & Wakefield.

Monthly office rents in the greater Central district, comprising Admiralty, Central and Sheung Wan, rose 4.9% to reach 126 Hong Kong dollars per sq. ft, or $174 per sq. meter, in the first half of this year, representing an 88% jump from the 1997 levels.

Central office rents are the highest in the world, surpassing major international business hubs over the past two years. London's West End ranked second globally with office rents at $12.4 per sq. ft per month, followed by Tokyo CBD at $9.1 per sq. ft per month, according to data released by the consultancy on Tuesday.

The strong demand is largely underpinned by mainland companies expanding their operations in Hong Kong, which accounted for 85% of major new leases in greater Central in the second quarter. That figure reached 55%, excluding notable deals such as the leasing of 93,600 sq. ft of space in Three Exchange Square by Chinese hospitality conglomerate HNA Group, up from 31% in the first quarter.

The consultancy has raised its forecast for greater Central rents to rise 4-7% in 2017. "It's a 100% rising trend for now," said John Siu, managing director at Cushman & Wakefield in Hong Kong, suggesting that rents there will reach HK$130 per sq. ft this year. "It's perhaps safe to say Central will retain its global top spot as the most costly place to rent offices this year."

While Siu noted Hong Kong would continue to attract multinational and Chinese companies to set up regional headquarters there, the soaring office rents would raise "inevitable concerns" about its long-term competitiveness.

Meanwhile, the rental gap between Central and non-core business districts on Hong Kong Island has widened to 58%, up from 56% a year ago, according to property consultancy JLL, prompting more multinationals to move out to cheaper alternative locations.

Legal firms including Mayer Brown JSM are among those relocating their back office functions to Wong Chuk Hang, an industrial-turned-commercial district in southern Hong Kong. JP Morgan will move part of its operations to the emerging business district of Kowloon East across the harbor, where office rents are expected to fall 10-15% this year due to abundant new supply.

The decentralization wave might not be much help in lowering rents in Central, however. "Their office space vacated is being backfilled mostly by [People's Republic of China] tenants seeking office space in Central, particularly in the top-tier buildings like IFC, Chater House, Cheung Kong Center and Exchange Square," said Ben Dickinson, JLL's head of agency leasing, pointing to a tight vacancy rate of just 1.9% in Central.

But mainland investors have apparently scaled back their buying spree in Central, raising more uncertainty for Hong Kong's richest man Li Ka-shing to cash in on his portfolio of office assets. The Center, an iconic 73-storey office tower and the fifth-tallest building in Hong Kong, has been reportedly up for sale by Li's Cheung Kong Property Holdings since last year without much progress.

"These [mega] deals can only be completed by big owner occupiers such as those from the PRC. The current capital controls mean they're out of the market at the moment," Denis Ma, JLL's head of research, told the Nikkei Asian Review on Monday.

This was despite anticipation that record-setting deals including the sale of the Murray Road car park site at HK$50,056 per sq. ft to Henderson Land Development last month would revive investment sentiment. "Still, we are seeing smaller deals being completed," Ma added.

Mainland investors only accounted for 7.6% of total investment volume in Hong Kong offices in the first half this year, significantly down from 31% in 2016, according to JLL.

Asia300

Cheung Kong Property Holdings Ltd.

Hong Kong

Market(Ticker): HKG(1113)
Sector:
Industry:
Finance
Real Estate Development
Market cap(USD): 31,736.48M
Shares: 3,697.49M
Asia300

Henderson Land Development Co. Ltd.

Hong Kong

Market(Ticker): HKG(12)
Sector:
Industry:
Finance
Real Estate Development
Market cap(USD): 28,191.81M
Shares: 4,001.14M

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