Weak demand, increased availability led to the first drop in overall office rents in five years

• Office
  absorption in Q2 supported by MNC cost-saving relocations and a significant
  amount of pre-leases in new completions
• Decreasing
  retail sales dented the rental growth in core retail areas, despite a general
  increase in tourist arrivals in the first five months of 2019
• Outlook of
  both office and retail leasing markets in H2 clouded by economic and
  geopolitical headwinds.

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HONG KONG, CHINA - Media
OutReach – 11 July 2019 - Global uncertainties and a drop in Wanchai/Causeway
Bay and Prime Central rentals due to weak demand contributed to the
territory-wide average office rent retreating for the first time in five years.
Nonetheless, overall absorption rebounded from the negative territory in Q1 to
498,134 sq ft in Q2, supported by MNC cost-saving relocations from core areas and
a significant pre-leasing in new completions, although net absorption in
Greater Central and Wanchai/Causeway Bay were down. Meanwhile, record-high
growth in visitor arrivals did not lead to corresponding growth in retail
sales. Most of the core retail rents recorded smaller quarterly growth than
that in Q1, and Central rents continued to drop, as noted by Cushman &
Wakefield, a leading global real estate services firm.

 

The rebound in net absorption in the overall Grade A
office market was largely due to the conversion of strong pre-leasing over the
past couple of years in new completions (a total of 410,700 sq ft) in Hong Kong
East and Kowloon East; whereas weakened occupier demand, plus some cases of MNC
decentralization and downsizing, have led to a negative absorption in Greater
Central (-182,352 sq ft) and in Wanchai/Causeway Bay (-90,795 sq ft). Mr John Siu, Cushman & Wakefield’s
Managing Director, Hong Kong, commented, “Weakened demand from PRC
firms in core areas, plus MNCs becoming more cost-conscious as trade tensions
remain unresolved, have led to a steady decline in overall absorption over the
past year, from 1.05 million sq ft in H1 2018, to 868,100 sq ft in H2 2018, and
to 479,325 sq ft in H1 2019.”

 

Prime Central and
Wanchai/Causeway Bay rentals began to soften in Q1, and the drop in Q2 has
deepened to 1.2% and 2.0% q-o-q, respectively. Rents in Greater Central and
Kowloon East also saw a mild dip of 0.7% and 0.4% q-o-q, respectively. Growth
in the other submarkets was led by Hong Kong East (up 1.4% q-o-q), but the
territory-wide average rent still edged down for the first time in five years
by 0.4% q-o-q. Mr Siu continued,
“Comparing the rental trend with the change in availability, Hong Kong
East has the tightest availability (3.9% when excluding the recent new
completion) and quality office space that is support rental growth there. In
Greater Central and Wanchai/Causeway Bay, although availability went up by at least
one percentage point from their respective Q1 figures, it is still considered
to be at a sustainable level (below 10%). The fact that 2020 will see no new
supply in any submarket will lend support to Central’s rentals, however the
outlook for H2 2019 is clouded by economic and geopolitical uncertainties, as
occupiers await a clearer picture before expansion plans can be resumed.”

 

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On a year-on-year basis, total tourist arrivals in the first five
months grew by 14.9% — the most significant growth in nine years — with a 20.7%
rebound in same-day Mainland visitor arrivals over the same period. Mainland
tourist volume in May alone was up 10.4% from April. However, retail sales fell
for four consecutive months, led by a drop in jewelry & watches (-4.4%
y-o-y). Reduced spending has dented the rental growth in core districts, where
Tsimshatsui and Mongkok recorded a smaller quarterly rental growth than in that
in Q1 at 0.7% q-o-q and 1.0% q-o-q respectively. Causeway Bay rents were up
0.7% q-o-q, and Central experienced a further drop of 3.0% q-o-q, almost double
that of Q1. In terms of vacancy, Central edged up to 8.6% from 7.1% in Q1 while
the other core districts stayed the same.

 

F&B spending continued to increase 4.8%-11.2% y-o-y except for
Chinese restaurants, but F&B rents still fell 0.8%-3% q-o-q on the Island
side while Tsimshatsui and Mongkok saw continued improvement of 0.4%-0.9%
q-o-q. Increased tourists, particularly same-day visitors who are less inclined
to cross the harbor to the Island side, supported the F&B rental growth of
0.4%-0.9% q-o-q in the Kowloon districts.

 

Mr Kevin Lam,
Cushman & Wakefield’s Executive Director, Head of Retail Services, Hong
Kong, said, “Cautious consumer
sentiment amid global and local uncertainties affected the performance of the
Hong Kong retail market in Q2, and the outlook is expected to remain subdued in
H2, except for trades like cosmetics, personal care and athleisure which should
hold up better than the rest.”

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 51,000 employees in approximately 400 offices and 70
countries. Across Greater China, there are 21 offices servicing the local
market. The company won four of the top awards in the Euromoney Survey 2017
& 2018 in the categories of Overall, Agency Letting/Sales, Valuation and
Research in China. In 2018, the firm had revenue of $8.2 billion across core
services of property, facilities and project management, leasing, capital
markets, advisory 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)