Greater Central rents record largest quarterly drop in seven years amid weak demand


  • Greater
    Central rents fell 3.2% in Q3, the largest quarterly drop since 2012; Souring
    sentiment and weakening demand set to lead to a forecasted fall of 6% to 8% in
  • Tourist
    arrival figures and retail sales in August plummeted, causing retail rents to fall
    across the board.


 – 3 October 2019 – Grade A office rents
in Greater Central softened significantly in Q3 against a backdrop of weak
leasing demand in core areas and a continuing trend of MNCs relocating to
non-core areas. A slew of pre-leasing transactions agreed well before the
social unrest commenced, contributed to an overall positive absorption, but in
general, tenants held off committing to relocations or expansion in the face of
growing economic and social instability. As a result, availability in Greater
Central rose to 7.4% in Q3, the highest level in 14 years. While the negative
impact has yet to fully trickle down into the office market, the retail leasing
market is taking the immediate brunt following a severe drop in tourist arrivals.


Net absorption in the overall Grade A office market fell
from 513,697 sq ft in Q2 to 295,214 sq ft in Q3. Most of the
transactions were concentrated in non-core areas such as Hong Kong East, where
in one of the largest examples, WPP leased 111,000 sq ft in K11 Atelier on
King’s Road. Whilst there were other significant leasing transactions in core
areas, their average sq ft size was much less than witnessed in previous
quarters. Mr Keith Hemshall, Cushman
& Wakefield’s Executive Director, Head of Office Services, Hong Kong
commented, “While pre-leasing deals concluded well before June 2019 supported
overall net positive absorption in the quarter, we have in fact witnessed a
deterioration in market sentiment with many clients shelving relocation or expansion
plans until the socio-economic situation improves. As a result, we expect demand
to drop considerably in Q4 with net absorption for 2019 falling to less than
half the level last year.”


As occupier movements fell,
demand weakened, and sentiment turned cautious, overall net effective office
rentals dropped for the second consecutive quarter to HK$74.7 per sq ft per
month (down 2.0% quarter-on-quarter). Led by a drop of 3.2% q-o-q in Greater
Central, most sub-markets experienced rental declines in the quarter. The only
exception was Hong Kong East where rentals edged slightly higher, by 0.3% q-o-q.
Mr John Siu, Cushman & Wakefield’s
Managing Director, Hong Kong
, commented, “As sentiment in the office
market has soured considerably in Q3 and with no end yet in sight to the current
instability, rents across all sub-markets will come under increasing pressure over
the remaining months of this year and into 2020. Our forecasts are for rents in
Greater Central to fall by between 6% and 8% this year and by between 8% and
13% next year.”

A summer of unrest has seen tourist arrivals to Hong Kong plummet,
led by a drop in Mainland tourist volumes by 42.3% y-o-y in August. Retail
sales took the brunt: Government figures showed the steepest decline on record
by 23.0% y-o-y in August, led by a drop of 47.4% y-o-y in the jewelry &
watches sector. The traditionally strong medicines & cosmetics sector also
recorded a drop of more than 30%.As sales dwindled, retail rents in both core
and non-core areas declined in Q3, led by a 7.0% drop in Causeway Bay which has
taken the hardest hit from the declining numbers of tourists and interruptions
to business due to the social unrest. With tourist arrivals expected to remain
muted in Q4, forecasts for rents in Causeway Bay in 2019 to fall between 11%
and 13% for the year as a whole.


F&B spending also decreased: As of September (estimation), business
for Chinese restaurants was down by 10-12% and non-Chinese restaurants down by 5-7%,
while the fast food and drinks sector maintained a growth of 1-4%. Alongside
the drop off in tourist arrivals, a fall in local consumption is also seen to
be a contributing factor to the decline as many seek to avoid the unrest,
particularly during evenings and on weekends.  As in the case of high-street retail rents,
F&B rents fell across all sub-markets, by between 3.0% and 4.1%, again with
Causeway Bay suffering from the sharpest drop.


Mr Kevin Lam,
Cushman & Wakefield’s Executive Director, Head of Retail Services, Hong
, said, “It is a hard time for
retailers and the dismal market sentiment will continue into the next quarter,
as a solution to the current social quagmire is not yet in sight. However, trades
that focus on mass market demand and local consumption should fare better, such
as the sports/athleisure and education sectors, should fare better in the
current environment. We are seeing a number of such retailers looking for
opportunities to expand or seeking a better rental package amid the current market

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