Greater Central office availability reaches a 15-year high

• Grade A office rental declined for the fifth consecutive quarter with Greater Central rents down by 7.5% quarter-on-quarter, the steepest drop among all submarkets
• Rental declines accelerated with Causeway Bay rents falling by 25% in the quarter; Outlook may improve in the second half with rents forecasted to begin to stabilize, depending on the situation of the local outbreak

HONG KONG, CHINA - Media OutReach - 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% means office rents will be under further pressure in the second half of the year. On the retail side, a more stable retail leasing landscape in Tsimshatsui helped boost the prospects there, which has overtaken Causeway Bay in terms of retail rents for the first time, according to Cushman & Wakefield, a leading global real estate services firm, in its review of the Hong Kong office and retail leasing markets today.

In Q2, net absorption in the overall Grade A office market 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 continuing to weigh on the market, the quarter saw a growing number of firms surrender space, especially within retail, tourist-related, financial and co-working sectors, all hard hit by the pandemic.

Mr Keith Hemshall, Cushman & Wakefield's Executive Director, Head of Office Services, Hong Kong, commented, "Office space take up is expected to continue to contract, leading to approximately 1.5 million sq ft of negative absorption for 2020, as corporates reduce headcount and shelve expansion plans. In addition, the formalization of 'work from home' initiatives for a proportion of staff is currently being closely evaluated as a cost saving and business risk management strategy, although the degree of its implementation 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 of the space freed up by such initiatives may be left vacant to reduce headcount density and increase social distancing but cost pressures should ensure a proportion 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 the downward trend, with Greater Central down by 7.5% from Q1, while Hong Kong East recorded the smallest decline among all submarkets, by 2.7% on the quarter.

Mr John Siu, Cushman & Wakefield's Managing Director, Hong Kong, commented, "With overall availability increasing, landlords are offering a more diverse range of incentives to generate demand for vacant premises or to retain existing tenants. For new tenants, longer rent-free periods, partial subsidy for fit-outs, stepped rental packages, flexible rights to break or sub-let space and bumper fees for introducing agents are all being seen. For existing tenants, we are seeing landlords agreeing to early lease restructures or renewals at less than the passing rent, often with rent free being provided to lower the effective rent."

"As surrender stock increases, we expect overall availability to reach approximately 12% by the end of 2020, depressing overall grade A rents by another 8% in the second half 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 in Q2 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 13,446 in Q2. Retail sales in May, at HK$26.8 billion, were down 32.8% 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 a struggling 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 that Tsimshatsui, with rents at HK$1,018 per sq ft per month, surpassed Causeway Bay as the most expensive retail district in Hong Kong for the first time.

Mr Kevin Lam, Cushman & Wakefield's Executive Director, Head of Retail Services, Hong Kong, commented, "The retreat of luxury will push the vacancy rate (7.9%) in Causeway Bay further up this year. Incoming, non-luxury tenants are likely to drag 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 there is owned by and has the support of several major developers. The different trade mix there and in Mongkok also means rents of these core submarkets will be more resilient than those of Causeway Bay and Central."

F&B rents saw a quarterly drop of around 15% for the core submarkets in Q2, but have stabilized towards the end of the quarter following the 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 a base demand that consisted of largely local consumption. With the growth momentum shifting to F&B, the sector could be close to bottoming out in both sales and rents.

Mr Lam said, "Amid the ongoing pandemic and rising unemployment rate, the prospects of high street retail remain challenging. Non-discretionary retail, pop-up shops, shopping malls with an organized promotional effort and more supporting elements for tenants, will be among the emerging trends in the coming quarters. In this regard, we expect shopping mall rents to be more stable than those on high streets in the second half, where it is expected to be slightly downward or stable at best for Causeway Bay and Central, while Tsimshatsui and Mongkok can look to rentals to possibly edge slightly upwards."

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