Tumbling office rents lure firms back to Hong Kong’s main business zone
International companies are relocating back to Central, Hong Kong main’s business district, where rents are down by a quarter from two years ago, giving organisations the opportunity to get an address in the city’s trophy buildings. S&P is relocating to Three Exchange Square in Connaught Place from ICC in West Kowloon later this year, a spokesman for the credit-rating agency has confirmed to South China Morning Post. The building is in Exchange Square, the complex that houses the Hong Kong International Arbitration Centre and the Hong Kong stock exchange.
Meanwhile, better rental packages have also convinced the likes of private equity firm FountainVest Partners to move from Three Garden Road, between Admiralty and Central, to IFC, one of the most iconic buildings on Hong Kong island. FountainVest leased 9,000 sq ft at HK$130 ($22.45) psf, about 7% lower than the rents a year ago, according to property consultancy Colliers. FountainVest could not be immediately reached for a comment.
US investment firm Susquehanna International Group is also leaving Three Garden Road to move to AIA Central, the building known for its resemblance to a Chinese junk boat, “with significant cost savings”. South China Morning Post has contacted Susquehanna for comment.
These moves come after Central endured a
7.6% vacancy rate, equivalent to 1.2 million sq ft of empty space, in the first quarter of the year, a 15-year high, according to Savills. Rents in the district fell 3.8%.
“Flight to quality is certainly a trend which companies are looking at,” said Fiona Ngan, head of office services, Colliers Hong Kong. “Grade-A office rents have dropped circa 25% over an 18-month period, so businesses can look to make the most of this drop and relocate to Central for the same cost from fringe or decentralised districts.”
At the peak of office rents in mid-2018, the gap between Central and Island East, one of the most popular non-central office options for many companies on Hong Kong island, was about 175%. This gap has narrowed to 120%, according to Colliers.
“In Central, rental declines and a stagnant 2020 have encouraged an increase in demand within the district, both for cost-saving moves that allow for changes in workplace standards, and equally, upgrading moves,” said Alex Barnes, head of the office leasing advisory at JLL.
“Two IFC for example has been a hotbed of activity in the last six months with tenants moving and expanding from nearby buildings into a trophy building. There is pressure on the district and market as a whole, but there are pockets of activity that are centred on these trends,” he said.
Although a number of companies are finding opportunity for better lease packages, decentralisation is likely to continue, according to other analysts.
“The chance of seeing tenants moving back to Central from the fast-maturing decentralised office clusters such as Kowloon East and Taikoo is low,” said Ada Fung, executive director and head of advisory and transaction services office, CBRE Hong Kong. CBRE estimates that rents in Central have slipped by 27% from two years ago.
“The rental gaps of around HK$52 between Central and Hong Kong East and of HK$75 between Central and Kowloon East still exist. This is still a big premium to occupiers on three- to six-year leases,” she said.
Other submarkets are also likely to see further rental declines, making them more attractive to companies, according to Daniel Wong, Midland IC&I CEO. Kowloon East is likely to underperform, with rents declining between 5% and 10% this year owing to oversupply.
“As a trend, we think that decentralisation will still take place,” said Wong.