Concrete Analysis | Playing field far from level in Hong Kong office market
Lack of available space, high costs and qualitative factors are prompting tenants to look outside of the Island region
Headline writers have been kept busy through the year reflecting a slowdown across property markets, as residential prices have dropped and demand for commercial space has become sluggish, leading to more abundant vacant space. While this may be true in certain sectors, the situation in the office market is somewhat more complex.
Undoubtedly, demand has slipped, reflected in net take-up for Grade A offices of less than 250,000 sq ft this year up to the end of July, compared to a long-term average of almost 2 million sq ft. However, net take-up is a measure of the change in occupied space and companies need available space in order to expand. Vacancy rates may have risen to almost 5 per cent across the market but remain sub 2 per cent for the most part on Hong Kong Island. Currently on Hong Kong Island there are only 10 whole floors (>10,000 sq ft) available to lease across just eight buildings. Simply put, there is not enough available space.
Over 10 million sq ft of Grade A office space on Hong Kong Island has a lease expiry due in 2017. Of this, almost 30 per cent is located in Central alone. Given that Central currently “enjoys” (from a landlord perspective) a vacancy rate of just 1.6 per cent, occupier options would appear to be limited. Lease renewals on landlords terms will be the outcome for many. Moreover many of the buildings which these tenants occupy are in excess of 20 years old, offering technical specifications that struggle to keep pace with modern demands. The playing field seems far from level for Central occupiers.
New supply is scheduled to appear on the market from next year but this is largely to be found in Kowloon East. Only two relevant projects will be completed on Hong Kong Island – the Henderson project at 18 King Wah Road in North Point during the second quarter and Hysan’s Sunning Plaza re-development scheduled for the fourth quarter. In light of the acute shortage of space on the Island and a substantial increase in supply elsewhere, it is worth deliberating on what occupiers really want.
At its heart, an office must accommodate and promote its tenants’ business activity. As the way we work changes, tenants are looking for a space that flexes with their needs and gives them a competitive advantage. Finance, of course, is a key component of any locational decision for an occupier, but occupiers have many different price points and it would be wrong to think that all decisions are made with cost as the primary concern.