New office completions pushed the overall net absorption to new quarterly highOffice rents grew across the board but the pace has slowed, as new leasing concentrated in non-core areasRetail market was robust but sentiment may change in view of trade tensions.

 

HONG KONG, CHINA -- October 8, 2018 - Office rents continued to grow across the board in Q3, but the growth has slowed compared with the last two quarters, as the business sector considered the impacts brought by the Sino-U.S. trade tensions. 

 

The trade tensions also affected the retail leasing market, which had been robust in 2018 until consumer sentiment began to cool over the summer and retailers became more prudent. However, the recent launch of the Express Rail Link in Hong Kong is expected to boost the tourist volume, as noted by Cushman & Wakefield, a global leader in commercial real estate services.

 

The territory-wide net Grade A office absorption rose to 931,810 sq ft in Q3, a three-year quarterly high, mainly due to the good pre-leasing performance of two newly-completed Grade A buildings in Hong Kong East and Hong Kong South. However, negative absorption was recorded in Greater Central (-117,633 sq ft) and Wanchai/Causeway Bay (-94,380 sq ft) due to several sizable tracks of stock returned to the market, while Hong Kong East (675,612 sq ft) and Kowloon East (213,387 sq ft) led the pack in absorption among all submarkets. 

 

Mr Keith Hemshall, Cushman & Wakefield's Executive Director, Head of Office Services, Hong Kong, commented, "Business activity and expansion slowed a bit in view of the trade tensions and its possible impact. However corporations are still driven by cost-savings behind their relocation exercises, and they prefer new supply. Thus the leasing of new office space in non-core areas was active in Q3."

 

Greater Central remained the costliest CBD in the world with monthly rents standing at HK$137.9 per sq ft, although the pace of growth in rentals in Greater Central slowed in Q3. But leasing demand in the CBD has been constrained by a lack of supply more than by the rising rentals, especially for PRC companies who remained keen on seeking prime space. 

 

Mr John Siu, Cushman & Wakefield's Managing Director, Hong Kong, said, "Greater Central's availability stood at 4.5%, still a tight level. We expect the limited availability and high rents in core areas will drive leasing demand to new supply in non-core office areas over the near term. In fact, the substantial absorption in Hong Kong East, Kowloon East and Hong Kong South in Q3 has already supported a stable growth in rents in those submarkets. As for the demand side, in contrast to the decentralization of MNCs, the co-working and fintech sectors are expected to be relatively active in leasing core space, in order to increase market share and to raise their corporate profiles. This will be a trend to watch for the coming quarters."

 

Retail sales in the first eight months of 2018 had been robust, led by a 22.2% year-on-year growth in sales of jewelry & watches. A surge in PRC tourists in August contributed to a year-on-year growth of 13.8% in tourist volumes from January to August. These positive factors supported a quarterly increase in retail rents from 0.7% to 1.4% in most core areas except for Central where rents dropped by 1.8%.

 

Vacancy in core locations generally improved in Q3, with demand supported by relocation requirements. However, demand remained weak in Central as vacancy there worsened to 7.1% from 4.3% in Q2. Meanwhile, the correction in F&B rents continued in Q3 by 0.6% to 2.2% despite a growth in F&B spending.

 

Mr Kevin Lam, Cushman & Wakefield's Executive Director, Head of Retail Services, Hong Kong, said, "Retail indicators up to August reflected a robust performance of the market since the beginning of this year. However, we expect the market to come under pressure in the next quarter in view of the trade tensions and potential threats such as the depreciation of the Renminbi which has come down by 8.7% against the Hong Kong dollar since April, and a broad reduction of import tariffs in the Mainland since July, both of which would undermine the price advantage of Hong Kong. Despite the recent launch of the Express Rail Link which should help to boost the volume of Mainland tourists, we maintain a conservative view on the outlook of the retail leasing market in the coming months." (mor).