Hong Kong’s CBD rental gap shrinks amidst COVID-19, creating ‘recentralisation’ opportunities for tenants

  • Hong Kong’s overall CBD rental gap against non-core areas narrows under the impact of COVID-19 and anticipated to decline further by 2022
  • Space optimisation, cost-effectiveness of rental rates and flight-to-quality provide strategic drivers for Hong Kong’s tenant-centric office leasing market 
  • Hong Kong’s Grade A office market in a consolidation phase with the CBD now offering ‘recentralisation’ options
  • CBD becomes tenant-centric as vacancy rates increase and cost-saving exercises become a priority

Hong Kong, 18 June 2020Colliers International (NASDAQ: CIGI; TSX: CIGI), a global leader in commercial real estate services and investment management firm, shares insights from its latest Flash Report, “After Covid-19: New Trends of the Hong Kong Office Market, which looks at ‘recentralisation’ opportunities, the new role of technology and workplace wellness becoming an expectation, not a value-add strategy.

Hong Kong’s Grade A office leasing market is entering a consolidation phase, with the rental gap narrowing to less than 70% between CBD (Central and Admiralty) and non-core areas. Fiona Ngan, Head of Office Services, Colliers International Hong Kong explained: “Hong Kong is one of the most dynamic office leasing markets in the world, especially when comparing the CBD and some non-core areas. Traditionally, there is high competition to secure lucrative space, but COVID-19 is compounding a weak economy with CBD rents forecasted to fall by 18% in 2020, after a 6% drop in 2019.”

Ngan expanded this by saying: “This market adjustment is creating change, but with that comes opportunity. For some tenants it can be the chance to exercise cost-savings, or for more ambitious tenants, the opportunity to re-build brand and move into an area that traditionally had high financial barriers to entry.”

Chris Currie, Head of Hong Kong Office Services, Colliers International Hong Kong said: “The fundamentals of Hong Kong remain the same. It’s a supply-challenged market which provides confidence for long-term tenant demand with stakeholders needing to be flexible and navigate short-term volatility. Layering in the narrowing rental gap and the upcoming future supply in Central, we believe demand will only increase as tenants look to explore leasing options to better utilise their space and become more cost-effective of their current rental rate as flight-to-quality emerges as a key trend.”

Hong Kong is still attractive as a gateway city, especially when considering major development projects in and around Central, and Hong Kong as a whole. “Currently, ‘recentralisation’ provides opportunity for tenants due to a drop in rents and an increase in vacancies. In the longer-term, infrastructure projects like Site 3 and the Greater Bay Area initiative will only increase demand, and we see potential interest from Mainland Chinese firms to choose Hong Kong as their preferred listing location amidst US-China tension, showing now is a good time to consider real estate strategies,” added Currie.

Commenting on COVID-19’s impact on the workplace, Chris Hui, Head of Landlord Representation, Colliers International Hong Kong said: “The pandemic has urged corporates to review their technology strategy. With the world undergoing a biggest work-from-home experiment, it’s highlighted some weaknesses, and strengths, in current approaches as organisations realise, they need to be flexible to better serve their people in connecting them to the business, and the workplace.”

It’s too early to conclude the lasting impact of COVID-19. But when analysing return to work strategies, it has raised people’s awareness of wellness and hygiene. “Asset owners need to adapt to provide solutions that meet the needs of tenants. For modern buildings, they tend to have new features and wellness certification such as LEED and WELL, which will be attractive to tenants. For older stock, reviews need to be conducted to asses retro fitting to improve cleanliness, well-being of building occupiers and ease concerns around safety in the workplace; subject to capital investment,” added Hui.

Click here to download the full report.

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