Hong Kong prime office rents continue to post record highs this year, despite consolidation and downsizing in Asia among many Western asset and wealth management firms, with Chinese groups now the dominant driver of demand for core real estate.
“Chinese firms continue to target highly visible grade A1 offices with harbour views, such as IFC and Cheung Kong Center, when entering the market,” said Andrew Yates, Hong Kong head of tenant representation at JLL.
Mainland companies are lining up to take the place of long-time tenants, such as US fund house AllianceBernstein and French bank BNP Paribas, that are leaving Central for cheaper locations, he noted.
Wealth management mergers in Asia, such as the ABN Amro-LGT deal late last year, have also resulted in reductions in staff and therefore in real estate requirements, added Yates. There is also potential impact of fund houses combining, such Aberdeen/ Standard Life and Janus Capital/Henderson.
And yet grade A office rentals in space-constrained Central rose 11.1% last year and have climbed a further 4.4% in 2017 as of mid-September to an average of HK$117.3 ($15) per square foot per month, according to JLL data (see figure 1 below). They have gained nearly 35% since bottoming out in early 2014 and have now exceeded the previous peak, set just prior to the 2008 global financial crisis.
Moreover, the vacancy rate for grade A offices in Central stands at just 2%, whereas historically it has been around 5% over the past 10 years.
And rents are expected to rise further due to consistent demand and limited availability, noted Yates. There are no new buildings of significance expected in Central in the coming two years, he added.
Typical moves have seen firms switching from grade A1 space to offices along Queen’s Road Central or even outside Central, to locations such as One Island East or Taikoo Place, both in Quarry Bay on the northeast of Hong Kong island, said Yates.
AllianceBernstein is vacating 30,000 square feet in One IFC, while BNP Paribas is moving out of 90,000 square feet space in Exchange Square. The French firm was immediately replaced by Chinese conglomerate HNA Group.
Before the recent surge in mainland demand, such offices would have taken more time to backfill, noted Yates, with landlords lowering their rental expectations to attract new tenants.
Moreover, the attraction of relocating to Quarry Bay is clear. Grade A office rents in Hong Kong East are, on average, around 60% less than in Central, noted Yates, and capacity is rising in that area (see figure 2 below).
Local developer Swire Properties is building two new grade A1 office towers in Quarry Bay: One and Two Taikoo Place, which it expects to have completed by next year and 2021, respectively.
In addition, a new underground bypass road is being built from Central to Hong Kong East, which is expected to cut travel time between Central and Quarry Bay; the target date for completion is late 2018 or early 2019.
(Full disclosure: AsianInvestor's parent company Haymarket Media relocated its Hong Kong office from Central to Taikoo, an area next to Quarry Bay, at the beginning of 2016).