While the global economy has started to see hints of recovery over the past few months, many businesses in Hong Kong continue to focus on reducing overhead costs including through giving back space. More are considering opportunities to restructure their lease for immediate savings. Over the past two months, the overall commercial market continued to see rising vacancy and declining rentals, yet the adjustments have started to narrow down with new enquiries emerging.
Relocation to more affordable alternatives in non-core districts remained an overriding trend in the commercial property market. The more notable relocation trend in June and July saw tenants from core districts such as Tsimshatsui move to Kwun Tong, Kowloon Bay or even Kwai Hing for lower occupation costs. Such decisions were eased ahead by the convenience of public transport and advanced building specifications. Under this situation, landlords from core districts were pressed to adjust their rental policy by providing deals below the market rent and offering non-financial incentives such as option to renew with rental cap, first right of refusal, etc. to incoming tenants.
Vacancies climb but international tenants trigger new enquiries
During the past two months, vacancy levels increased in all sub-districts except Kowloon East which continues to be the star destination for decentralisation. As at the end of July 2009, vacancy stood at 5.0% in Central, 5.5% in Wanchai/Causeway Bay, 3.6% in Hong Kong East, 5.6% in Tsimshatsui and 21% in Kowloon East. The overall vacancy for the Hong Kong Grade A office market was 7.5%.
“Due to rising vacancies, some Landlord’s are offering attractive leasing packages to retain existing tenants and to draw new occupiers. Also, more tenants are thinking about how to restructure their lease in order to create immediate savings and dispose of the excessive space which have come from their M&A movements. This has increased vacancy across all sub-markets. Kowloon East is an exception because its many new quality completions and affordability is hugely attractive to companies looking to diversify from core areas,” said Gavin Morgan, International Director and Head of Markets, Jones Lang LaSalle.
“We have also seen an increase in international tenants looking to set up offices in Hong Kong, reinforcing signs that the global economy is recovering. However, for the moment the majority of new prospects are taking a speculative approach and have not committed to a significant amount of space. Despite these new enquiries, the amount of confirmed upcoming vacancy is likely to exceed the amount of take up for the second half of 2009.”
Rentals decline overall but with signs of stabilisation
The commercial property market experienced an overall drop of 30.2% in rentals since the beginning of the year. Central and Wanchai/Causeway Bay are the two districts that recorded a more significant decrease, at -36.7% and -27.0% respectively, due to tenants receding from the core markets and looking for cheaper alternatives. Nevertheless, the decline has started to narrow down with mild drops only over the past couple of months.
“There are signs that the global economy is back on track for an upturn, yet it will take a while for rental performance in Hong Kong to catch up with this trend. Due to the high volume of M&A activities brought about by the financial crisis, many large corporations are only just beginning to determine their real estate requirements going forward. We suspect that many of these larger corporations will exercise options to give up space where available and search for cost effective solutions for back office space. Under this pressure, vacancy levels are expected to rise in core locations while rentals will continue to decline,” said Gavin Morgan.
Some tenants seize declining rentals to upgrade premises
While the financial crisis has led to the downsizing and even shutting down of many businesses, some corporations took advantage of declining rents to upgrade their office premises and gain flexible leasing packages. Tenants from core districts continue to seek cost savings by shifting to non-core districts such as Kwun Tong, Kowloon Bay and even Kwai Hing, due to lower occupation costs, a well-developed public transport network and advanced building specifications.
The decentralisation movement to Kowloon East remains strong as new developments including Kwun Tong 223, Landmark East, Manhattan Place, Exchange Tower and Kowloon Commerce Centre continue to attract tenants who seek lower rentals yet better quality options.
“While we are experiencing decentralisation, there is also a lot of activity within Grade A1 premises in Central with several ongoing negotiations and recent transactions in Two IFC, Cheung Kong Centre and Chater House. Jones Lang LaSalle’s recent transactions with Baring Private Equity and legal firm DLA Piper’s relocations to Two IFC and The Landmark respectively are good examples indicating that while some tenants are decentralising, others are taking advantage of the unique circumstances to upgrade their offices in core areas.”
On the upcoming trend in the commercial market, Gavin Morgan said, “We expect that rental levels will continue to decrease in core areas in the coming months, but at a much slower rate than during the first half of 2009. Rentals will also start to stabilise in non-core locations. Having said that, there is a large amount of confirmed upcoming vacancy which has yet to come back to the market, This is expected to boost vacancy levels and drive down rents in the second half of 2009. Although there are signs indicating that the global economy is starting to recover, it will take a while for the local office market to pick up. With the rental differential between buildings decreasing, we expect to see a decline in the amount of tenant movement and an increase in lease restructuring activities.”