Hong Kong’s notoriously pricey office rental sector

Hong Kong’s notoriously pricey office rental sector is fast becoming a tenants’ market as last year’s protest movement and the current coronavirus pandemic have prompted struggling companies to bail on their leases.

A huge increase in firms, from co-working space providers to finance companies and retailers, abandoning their offices before the contracts expire has helped free up space and contributed to a fall in rental rates.

“Given that real estate is one of the single largest costs in operating a business, particularly in Hong Kong, lease surrender cases are becoming more prevalent as a means to generate savings,” said Chris Cohen, a data analyst at Savvi, a Hong Kong-based data-driven real estate platform founded in 2018 that specialises in office, off-market and lease surrender opportunities.

Office rents across the city have been falling hard this year, with vacancy rates in areas such as Admiralty and Central soaring as the health crisis further saps demand already dented by months of social unrest. Many analysts see the situation worsening this year.

Companies that surrender space have typically overextended themselves through expansion or “are currently paying market-peak rentals in what is one of the world’s most expensive office markets,” said Cohen.

Firms that gave up office space this year were predominantly mainland Chinese ones and those whose businesses were hit particularly hard by the virus and last year’s social unrest, such as retailers, according to Wendy Lau, senior director of Hong Kong office services at Knight Frank.

Sometimes the rental contract can be broken legally if tenant and landlord reach an agreement on terms, which might include compensation.

“If their business or operation is affected, they will consider cost-saving exercises more seriously”, which may include surrendering some office space, added Lau.

“They either cut the size or move to cheaper places. Surrender means they would seek replacement [tenants] during the lease,” added Lau.

The number of so-called surrendered listings for Hong Kong office space in the first three months of 2020 was double that for the whole of last year, according to Savvi, which cooperates with landlords, agents and tenants to deliver property services in cities including New York, Singapore and Shanghai. Savvi says it has a network of more than 10,000 tenants, giving it access to a large amount of listing data.

Hong Kong Island alone has recorded 500,000 to 600,000 sq ft of surrendered listings so far this year, almost twice the 250,000 to 350,000 sq ft during the whole of 2019, the company said. The 600,000 sq ft is equivalent to the size of 9.3 standard football pitches measuring 6,000 square metres each.

The amount of space vacated in the first three months has been almost 10 times the quantity in the same period last year by square footage, said Cohen.

“We anticipate a month-on-month increase of 20 to 30 per cent in surrender and upcoming lease listings … for at least the next three months,” he added.

Source: https://www.scmp.com/property/hong-kong-china/article/3077163/worlds-costliest-offices-are-poised-enter-tenants-market

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