HK Grade A office rents dip in 3Q; fundamentals remain sound

    The positive rental growth of Hong Kong's Grade A office ended its seven-consecutive-quarter run abruptly in 3Q with overall rents falling by 1%, while the vacancy rate remained low (3.8%), according to real estate advisor Savills.
  All sub-markets saw a drop except Kowloon West where rents remained unchanged.
  On a positive note, Mainland firms remain committed to Hong Kong, even if some multinationals may be weighing up other regional alternatives. New supply over the next five years will be focused in Kowloon East and fringe island while 2023 will see major new projects completing in Central.
  The overall fall in rent ended the rising trend seen since 3Q/2014 when the Shanghai-Hong Kong Stock Connect was launched. On Hong Kong Island, Wanchai/Causeway Bay was hardest hit (-1.6%), followed by Central (-1.3%, a fall for the first time since 3Q/2014) and Island East (-1.1%, the first rental declines since 2014). The falls were much milder in Kowloon (Tsim Sha Tsui: -0.8%; Kowloon East: -0.2%; Kowloon West: unchanged).
  The prospects for the key demand drivers, Mainland firms and co-working operators, have dimmed suddenly over 3Q as a result of the US/China trade tensions and the social unrest.
  During the 5 years from 2019 to 2023, Savills expects a new Grade A office supply to total around 9.3 million square feet net (i.e. about 1.86 million square feet net per annum). Kowloon East will see the most significant supply with 3.7 million square feet net or 39% of the total, followed by Kowloon West (1.5 million square feet net, 16%) and Island East (1.2 million square feet net, 13%). Only 1 million square feet net (19.3%) will be situated in Central and all of it will be completed in 2023 (e.g. The Hutchison House and Murray Road Carpark developments, Site C of the Peel Street/Graham Street project). Five-year take-up in Hong typically averages around 1.1 million square feet per annum.
  "Many businesses have been hard hit by the trade tensions and the recent social unrest but with vacancy below 5% rents remain relatively firm. If current conditions persist into next year, however, rents will see much heavier declines. With new supply in Central not expected to complete until 2023, rents in the district will be reasonably well supported." said Simon Smith, Senior Director, Research & Consultancy.
  "Burn rates in the co-working industry are high and survivability may become a challenge in this environment. Facing lease expiry next year, most tenants are now prepared to wait before entering negotiations. Looking more positively at the market for flexible space, current uncertainties and hazy prospects for a swift resolution may boost demand from tenants unwilling to commit to one- or two-year leases." added Ricky Lau, Deputy Managing Director & Head of Office Leasing.