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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Photo
Caption
From Left to Right: Mr Keith Hemshall, Cushman & Wakefield's Executive
Director, Head of Office Services, Hong Kong, Mr John Siu, Cushman &
Wakefield's Managing Director, Hong Kong and Mr Kevin Lam, Cushman &
Wakefield's Executive Director, Head of Retail Services, Hong Kong

About Cushman & Wakefield

Cushman & Wakefield (NYSE: CWK) is a leading global
real estate services firm that delivers exceptional value for real estate
occupiers and owners. Cushman & Wakefield is among the largest real estate
services firms with approximately 53,000 employees in 400 offices and 60
countries. Across Greater China, there are 22 offices servicing the local
market. The company won four of the top awards in the Euromoney Survey 2017 and
2018 in the categories of Overall, Agency Letting/Sales, Valuation and Research
in China. In 2019, the firm had revenue of $8.8 billion across core services of
property, facilities and project management, leasing, capital markets,
valuation and other services. To learn more, visit www.cushmanwakefield.com.hk
or follow us on LinkedIn (https://www.linkedin.com/company/cushman-&-wakefield-greater-china)