Hong Kong Skyscrapers Lose Some Sheen - The Wall Street Journal

Hong Kong’s Central district, where occupancy costs for prime offices were 48% higher than in... — Hong Kong’s Central district, where occupancy costs for prime offices were 48% higher than in Midtown Manhattan last year.
Photo: Liau Chung-ren/Zuma Press

June 30, 2020 8:00 am ET

The luster is fading from Hong Kong’s office-rental market, the world’s priciest, showing how the pandemic is adding to the strains of social unrest and U.S.-China tensions.

Brokers and analysts say rents for prime offices in Hong Kong could fall 12% to 20% this year, building on declines that began last year.

High-end, or Grade-A, office rents surged for roughly a decade, thanks to robust demand from international businesses such as banks, insurers and law firms, as well as Chinese enterprises eager to build their presence in Hong Kong. A survey last year by Jones Lang LaSalle Inc. showed that occupancy costs for prime offices in the Central district, at $313 a square foot per year, were 48% higher than in Midtown Manhattan.

But that rally has gone into reverse, as more office space stands empty. Vacancy rates have surged to 5%, the highest since the aftermath of the global financial crisis.

“Rising vacancy has put pressure on rents,” said Nelson Wong, head of research for Greater China at JLL in Hong Kong. “Landlords are more willing to make concessions, and some tenants are taking advantage of the downturn to renew their leases at more accommodative rental levels.”

Fiona Ngan, head of office services for Hong Kong at Colliers International, said some tenants were negotiating to cut rents or defer payments, or were considering relocating to more affordable districts.

The new coronavirus has changed priorities for some companies, increasing the value of good transport links and strong estate-management capability, she added. Ms. Ngan said remote working and hot desking could reduce some companies’ space requirements by up to 20%.

The pace of any recovery will depend partly on how fast the city’s economy and its borders reopen, given these curbs have muted business activity and delayed corporate decisions.

Tom Gaffney, regional managing director for the Greater Bay Area and Hong Kong at CBRE, said rents and vacancy levels would remain under near-term pressure.

“The next six to 12 months is really going to shake a lot of companies out,” he said, referring to corporate tenants. “The reality is that people are going to give up space as they let go of some departments and reduce footprint.”

The downturn is a headache for landlords such as Hongkong Land Holdings Ltd., Swire Properties Ltd. and Hang Lung Properties Ltd., whose shares already trade at large discounts to net asset value. JPMorgan analysts expect earnings per share to fall for those and the two other listed landlords they cover.

A key question is how much support will come from mainland Chinese business, a driver of the market in recent years.

Ricky Lau, head of office leasing at Savills in Hong Kong, said demand for office space is unlikely to crash in the long run and that Chinese finance remains a bright spot.

“With U.S.-China tensions escalating, more and more U.S.-listed Chinese firms and unlisted tech startups would consider a listing in the city, helping sustain demand for financial services and hence prime office space in Hong Kong,” Mr. Lau said.

Alibaba Group Holding Ltd., the e-commerce behemoth, earlier this year added a floor in the Times Square office building in Causeway Bay, boosting its floor space by around a quarter to 85,000 square feet. Several Chinese banks and brokers, including China Minsheng Banking Corp., have also expanded their office space, brokers said.

Others are more cautious. Ms. Ngan at Colliers said that while Chinese technology firms and other Chinese companies are more resilient in a global downturn, those groups tended to expand modestly and gradually.

Cusson Leung, JPMorgan’s head of Asia property research, said, “We do not expect any near-term recovery of office demand given a broader shrinkage of businesses and the lack of new demand from Chinese corporates.”