Pre-leasing in newly completed buildings drives increase in office absorption levels while rents show signs of peaking

• Office absorption
  in Q1 grew to 77,101 sq ft from negative territory in last quarter
• Amid the
  weak demand from PRC firms and co-working operators, rents in Greater Central were
  flat but were largely stable in other submarkets, supported by continued
  decentralization
• Retail
  locations on the Kowloon side are benefiting from the new transportation links
  and are forecast to see relatively strong rental growth this year.

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HONG
KONG, CHINA - Media OutReach - 10 April 2019 - Office absorption rose to 77,101 sq ft in Q1 from
negative territory, supported by the realization of pre-commitments in two
recent completions totalling 127,483 sq ft along with some easing in trade tensions between
China and the U.S. Demand was heavily driven by relocation and consolidation
requirements, with the insurance sector particularly active. However, rents in
Greater Central which were flat in the quarter showed signs of beginning to
peak, on the back of weak demand from PRC firms. In the retail leasing
market, core retail areas in Kowloon are benefiting from new transportation
infrastructure, which is funnelling visitor traffic into West Kowloon and Tsimshatsui, as noted by Cushman & Wakefield, a global leader
in commercial real estate services.

 

The territory-wide net Grade A office
absorption rose from a negative -11,744 sq ft in Q4 2018 to 77,101 sq ft in Q1,
with more than 97,000 sq ft of the demand concentrating in Kowloon East and Greater Tsimshatsui, although part of it was offset by negative absorption in
Wanchai/Causeway Bay due to regular return of space. Mr Keith Hemshall, Cushman & Wakefield’s Executive Director, Head
of Office Services, Hong Kong, commented, “Kowloon East continued to
attract relocation and consolidation requirements, and the insurance sector was
a key driver of the demand. Meanwhile, a few financial services firms picked up
pockets of space in Central, keeping absorption in positive territory despite a
slowdown in growth by PRC and co-working firms in the sub-market.”

 

Healthy demand levels with
limited availability in many submarkets led to minimal growth of
0.2% overall rents in Q1, while Prime Central rents softened with a 0.4% drop q-o-q. Mr John Siu, Cushman & Wakefield’s Managing Director, Hong Kong,
said, “Greater Central rents were flat at HK$139.1 per sq ft per month
while Prime Central was under pressure as demand from PRC firms remained weak. But
with Greater Central’s availability rate edging lower to 5.1% (4.1% for prime Central
buildings), the high rents are still sustainable due to the low availability.
Looking forward to Q2, we expect financial companies, especially new players,
will be more active in looking for space in Greater Central for a prestigious
address, while companies with consolidation needs will continue to head to
non-core areas such as Kowloon East which are able to meet large space
requirements at lower rentals.”

 

Supported by the new transportation links to mainland China, average daily Mainland visitor arrivals grew by 19% y-o-y during the first two
months of 2019 — the biggest y-o-y growth in five years — with a 21% rebound y-o-y
in same-day visitor volume. This funneled more business to the retail areas in
Kowloon in particular. Meanwhile, a growth in sales for cosmetics and medicines
against the general drop in retail sales in the first two months supported the
expansion of cosmetics shops in various locations. Due to the shifted spending
pattern to non-discretionary retail, plus the improved business brought by
increased visitors, Tsimshatsui and Mongkok recorded a bigger quarterly rental
growth of 1.1% and 2.6% respectively, compared with 0.6% growth in Causeway Bay
and a 1.6% drop in Central.

 

Improved business drove Tsimshatsui’s vacancy rate down to zero,
the same level as in Causeway Bay. Mongkok’s vacancy also tightened to 5.5%
while Central remained at 7.1% — the location with the highest vacancy. With
respect to F&B rents, the pressure was on Causeway Bay as business growth
there lagged behind Tsimshatsui and Mongkok, while operators continued to be
challenged by a tight labor market. These factors have caused F&B rents in
Causeway Bay to trend down by 3.8% q-o-q, the most significant decline among
all core locations.

 

Mr Kevin Lam,
Cushman & Wakefield’s Executive Director, Head of Retail Services, Hong
Kong, said, “Despite a fall in retail
sales in the first two
months of the quarter, growing tourist volumes and a
rebound in the Renminbi are expected to support the retail market in Hong Kong
in general. The launch of the new transportation links to mainland China has
brought clear benefits to sales in Tsimshatsui and Mongkok but less so on the
Island side. If these trends continue, we can expect comparatively higher
rental growth in Tsimshatsui and Mongkok than in Causeway Bay this year.”

 

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 20 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)