Hong Kong’s office landlords face a tough rebound

Hing Kong

Hong Kong offices are emptier than in other Asian financial centres. While its borders are open and the city has dropped its mask mandate, a recovery looks tough. Commercial real estate space is growing, and there are fewer tenants.

Overall prime office vacancies in the hub rose to over 12% in the three months to December, up from less than 10% last year, according to property consultancy JLL. Singapore and Tokyo boast rates well under half of Hong Kong’s level, and figures there are either improving or roughly unchanged. Premium office rents in the gateway to China have fallen nearly 30% since mid-2019.

Most worrying is waning interest from the People’s Republic. Last year, mainland-based companies accounted for less than 6% of all leases in Hong Kong’s key Central business district, from nearly 30% in 2019. Ongoing weakness in the world’s second-largest economy means those tenants may be slow to return.

Some developers have fared better than others. The $10 billion Hongkong Land, the largest landlord in the Central district, maintained an enviable vacancy rate of around 5% during Covid. Elsewhere, the vacancy rate hit 21% last year at CK Asset-owned Cheung Kong Center, home to Goldman Sachs’ (GS.N) main office. Meanwhile, HSBC financiers in the city are fretting over losing their private offices as the bank aims to cut its non-branch real estate by 40% globally on pre-pandemic levels, though a person familiar with the situation told Breakingviews the reduction may not apply to the city.

Positive signs are emerging. Invesco’s recent 10-year deal for a lease in Jardine House, walking distance from the IFC mall, shows tenants have won some pricing power, since earlier agreements typically lasted for two to three years. But it is a vote of confidence in the city’s long-term potential. And it’s not just financial groups: auction houses Christie’s, Phillip’s and Sotheby’s, are all expanding their Hong Kong presence.

Even if business optimism is returning, office supply in Hong Kong is set to rise by 3 million square feet, roughly 3%, this year as new towers such as the Henderson and Cheung Kong Center II come onto the market. Hong Kong’s economy shrunk for three of the last four years, and its population is slimming too. Floored landlords will be eagerly awaiting the return of companies from mainland China.

CONTEXT NEWS

Senior investment bankers at HSBC in Hong Kong could lose their private offices as the firm moves towards open-plan desks for the financial hub, Bloomberg reported on Feb. 28, citing unnamed sources. The bank’s main building in Central is currently undergoing renovation.

The firm is looking to cut non-branch-based commercial real estate by 40% globally compared to pre-pandemic levels, HSBC said in 2021. However, the plan to reduce its office footprint may not apply to Hong Kong, a person familiar with the situation told Breakingviews.