HONG KONG, July 22, 2014 /PRNewswire/ —
- Office leasing activities remained sluggish in the first half of 2014, leading to a 1.8% drop in overall grade A office rent.
- Landlords will continue to show flexibility in their efforts to attract and retain tenants. As a result, rents are likely to drop by an additional 1% to 2% in the second half of 2014. Greater Central rents will be stable.
- The retail sector continued to face headwinds with retail sales growth slowing markedly. Moderating sales performance and more cautious sentiment impeded retailers’ expansion in the first half of 2014.
- Prime street shop rents eased by an average of 2.0% over the past six months; rents are likely to be stable or decrease slightly in 2H 2014. Local consumption is intact and the outlook remains generally positive.
Cushman & Wakefield, the world’s largest privately owned real estate services firm, today released a mid-year update on the Hong Kong office and retail leasing markets and the outlook for the second half of 2014.
Office leasing demand stays soft causing overall grade A office rent to ease slightly
Office leasing demand remained sluggish in the first half of 2014, whereas Grade A office net absorption totaled a modest 123,000 sq ft and only crossed into positive territory due to take-up in Kowloon East, primarily within new stratified buildings completed since late 2013. By submarket, leasing activities continued to gain momentum in Greater Central, as evidenced by positive net absorption of 120,500 sq ft, but remained subdued in other locations. Greater Central continued to see leasing demand being supported by mainland Chinese financials and tenants with smaller-sized requirements. For example, China Securities International recently expanded by a floor of 13,000 sq ft in Two Exchange Square earlier this year, while China United Credit Finance took a whole floor of 22,000 sq ft in Two Pacific Place. Foreign financials situated in the district are still tending to downsize (RBS in AIA Central) or relocate for cost savings (Wells Fargo moving from AIA Central to Three Pacific Place), but there were several instances of space upgrades (Banco Santander and Wellington Global Investment. moving from One Exchange Square to Two IFC; UOB consolidating from Landmark and Cosco Tower to Citibank Plaza). Tenants on 3-year leases expiring this year are facing market rents which are, on average, 20% lower than those under their current lease.
Wan Chai/Causeway Bay, Hong Kong East and Tsim Sha Tsui all recorded slight negative absorption of between 50,000 to 60,000 sq ft over the past six months due to higher availability and tempered demand as more occupiers have shelved their expansions or seek to consolidate their office space. These trends are becoming more prevalent in fringe-core and non-core office districts, where office rents are still at or near peak-levels. After dipping slightly to 5.0% in 1Q 2014, office availability rate climbed back to 5.4% in 2Q 2014. Both Wan Chai/Causeway Bay and Tsim Sha Tsui’s availability rates climbed to approximately 5.0% by mid-year, while availability in Hong Kong East, still the lowest at 3.2%, climbed to its highest level in two years due to some large tenants, such as Time Warner, Nokia, and Western Union releasing space into the market. In Tsim Sha Tsui, Deutsche Bank and Morgan Stanley in ICC consolidated operations which caused the district to experience the largest upswing in availability in recent months. Greater Central availability, which has stood at roughly 7.0% since 2Q 2012, remains the highest by district.
Overall grade A office rents dropped by 1.8% in the first half of 2014, led by a 5.5% drop in rents in Kowloon East. Kowloon East landlords are facing added pressure from new strata units put up for lease and also several new industrial revitalization projects to be completed this year whose low pre-commitment rates are indicative of slower overall demand. Rents inched upward by 0.7% in the first half in Wan Chai/Causeway Bay, but dropped mildly in other districts. Greater Central rents continued to hover around HK$96-97 per sq ft, on average. Gary Fok, Executive Director, Commercial – Hong Kong, said, “We anticipate that the Greater Central leasing market will continue to exhibit a stabilizing trend owing to a gradual improvement in demand. Availability will slightly ease and rents will remain stable over the next six months. Outside of Greater Central, demand has been sluggish with few tenants willing to expand or absorb relocation costs. Landlords will continue to show flexibility in their efforts to attract and retain tenants, most notably in Kowloon East where availability is higher. As a result, rents will drop by an additional 1% to 2%, but not more than this because availability is still at a healthy level, and there is a lack of new supply especially in core and fringe-core locations.”
Sales slowdown urging caution, leading to slower brand expansion and a drop in rents
The retail sector continued to face headwinds associated with slower tourism growth and changes in visitor profile and spending in the first half of 2014. These factors, as well as a high base for comparison last year, caused the slowdown of retail sales to deepen. Total retail sales decreased by 0.2% year-on-year from January to May. The slight drop was led by the downturn in sales of watches and jewelry, which dropped by 14.3% after robust sales in mid-2013. Apparel and department stores sales and restaurant receipts all grew stably owing to intact local consumption.
Moderating sales performance and more cautious sentiment impeded retailers’ expansion in the first half of 2014. Luxury brands have stayed conservative, while watch and jewellery retailers notably cut back on new stores. Several leading local retailers announced lower sales during recent holidays and are also taking more cautious approaches. Despite the hurdles, Hong Kong has not lost a step as a leading retail destination in Asia, and, therefore, in its ability to attract new brands and support expansion of existing ones. As evidenced by recent activity, including Topshop’s and Esprit’s planned expansions and the entrance of J.Crew, renowned international brands are showing a long-term commitment to the market, which is also seeing a shift toward a more diverse offering of middle to high-end brands.
Vacancies in main streets have remained low, but have risen in 2nd and 3rd tier streets over the past six months. Prime street shop rents eased slightly in the first half of 2014, having dropped by an average of 2.0%. During the first half of 2014, average rental increment on renewals and new leases stood at approximately 40%, which is down from 60% to 70% growth during the same period last year. In the second half of 2014, we expect that prime shop rents will be relatively stable, potentially falling by 2% to 3%, while more secondary locations will see a slightly steeper adjustment of 5% to 8% due to higher vacancy and slower demand. Michele Woo, Executive Director, Retail – Hong Kong, said, “Luxury brands have turned more cautious as sales growth has slowed amid the shift toward more affordable luxury and mid-priced goods. Their slower expansion has opened some doors for more mid-tier brands, but they also operate under tighter margins, therefore, their real estate affordability is comparatively lower and this will have an impact on rents. Nonetheless, the outlook for the sector is still positive. The local consumer base remains strong and tourism is still growing at a high rate. Hong Kong will maintain its position as the premier shopping destination in Asia and this will continue to bring new brands to the city.”
APPENDICES
I. GRADE A OFFICE LEASING TRANSACTIONS
Date |
Tenant |
Building |
District |
Area (sq ft) |
Reason for Lease |
Existing Address |
2Q |
United Overseas Bank |
Citibank Plaza |
Greater Central |
33,500 (L) |
Relocation & Consolidation |
COSCO Tower & Landmark |
2Q |
China UCF Group |
Two Pacific Place |
Greater Central |
22,100 (L) |
Relocation & Expansion |
Hutchison House |
2Q |
Nissan |
Hopewell Centre |
Wan Chai/ Causeway Bay |
46,000 (L) |
Relocation & Expansion |
Citibank Tower |
2Q |
Wells Fargo |
Three Pacific Place |
Wan Chai/ Causeway Bay |
32,000 (L) |
Relocation |
AIA Central |
2Q |
Societe Generale |
Three Pacific Place |
Wan Chai/ Causeway Bay |
16,300 (L) |
Expansion |
Three Pacific Place |
2Q |
FWD |
Devon House |
Hong Kong East |
27,000 (L) |
Expansion |
Devon House |
2Q |
Compass Office |
Silvercord Tower 2 |
Tsim Sha Tsui |
11,500 (G) |
Expansion |
N/A |
2Q |
E. Sun Commercial Bank |
The Gateway Tower 6 |
Tsim Sha Tsui |
7,400 (G) |
Expansion |
The Gateway Tower 6 |
2Q |
National Investment Fund |
Octa Tower |
Kowloon East |
23,800 (G) |
Expansion |
Great Eagle Centre |
2Q |
Sainsbury’s Asia |
Millennium City 1 |
Kowloon East |
21,400 (G) |
Relocation |
The Gateway Tower 1 |
1Q |
Wellington Global Investment |
Two IFC |
Greater Central |
23,000 (L) |
Relocation |
One Exchange Square |
1Q |
Banco Santander, S.A. |
Two IFC |
Greater Central |
18,400 (L) |
Relocation |
One Exchange Square |
1Q |
HK Sanatorium & Hospital |
One Pacific Place |
Greater Central |
39,000 (L) |
New Set Up |
N/A |
1Q |
Principle Insurance |
Hopewell Centre |
Wan Chai/ Causeway Bay |
16,400 (L) |
Expansion |
Hopewell Centre |
1Q |
|
One Island East |
Hong Kong East |
11,000 (L) |
New Set Up |
N/A |
1Q |
Medisun Co. |
Octa Tower |
Kowloon East |
46,200 (G) |
Expansion |
Great Eagle Centre |
1Q |
Compass Office |
Langham Place Office Tower |
Kowloon West |
17,400 (G) |
Expansion |
N/A |
1Q |
Sun Life Financial |
Two Harbourfront |
Kowloon Others |
22,000 (G) |
Expansion |
Two Harbourfront |
II. MAJOR OFFICE SUPPLY
Completion |
Project Name |
District |
Developer |
NFA (sq ft) |
Single Owner / Strata-Title |
2014 |
33 Des Voeux Road Central |
Greater Central |
Bank of East Asia |
53,500 |
Single Owner |
Billion Plaza II |
Kowloon West |
Billion |
166,200 |
Strata-Title |
|
Pioneer Place (revitalized ind bldg) |
Kowloon East |
Pioneer Global |
184,300 |
Single Owner |
|
KOHO (revitalized ind bldg) |
Kowloon East |
Pamfleet |
157,500 |
Single Owner |
|
KC100 (revitalized ind bldg) |
Kowloon West |
Campell Group |
157,500 |
Single Owner |
|
Octagon |
Kowloon West |
K Wah |
296,700 |
Single Owner |
|
Sub-total: |
1,015,700 |
||||
2015 |
50 Wong Chuk Hang Road |
Hong Kong South |
SHK |
68,000 |
Strata-Title |
41 Heung Yip Road |
Hong Kong South |
Cheung Kong |
186,800 |
Single Owner |
|
2-12 Observatory Road |
Tsim Sha Tsui |
Lai Sun & Henderson |
139,700 |
Single Owner |
|
10 Shing Yip Street |
Kowloon East |
Billion |
198,300 |
Strata-Title |
|
15-17 Chong Yip Street |
Kowloon East |
Billion |
201,500 |
Strata-Title |
|
52-56 Tsun Yip Street |
Kowloon East |
Billion |
297,700 |
Strata-Title |
|
Manulife Tower (One Bay East – West Tower) |
Kowloon East |
Wheelock |
409,600 |
Self-Use |
|
Citibank Tower (One Bay East – East Tower) |
Kowloon East |
Wheelock |
409,600 |
Self-Use |
|
33 Tseuk Luk Street |
Kowloon East |
SHK |
196,000 |
Strata-Title |
|
Sub-total: |
2,107,200 |
||||
2016 |
Joyce Centre |
Hong Kong South |
Kwong Hing Investment |
130,800 |
Single Owner |
34 Wong Chuk Hang Road |
Hong Kong South |
K Wah |
132,800 |
Single Owner |
|
22 Des Voeux Road |
Greater Central |
Chinachem |
65,400 |
Single Owner |
|
10-12 Queen’s Road Central |
Greater Central |
SH Comm. Bank |
106,200 |
Single Owner |
|
Wing On Central Building |
Greater Central |
Chinachem |
72,100 |
Single Owner |
|
8 Cannon Street |
Wan Chai/Causeway Bay |
Phoenix |
142,600 |
Single Owner |
|
14-30 King Wah Road |
Hong Kong East |
Henderson |
230,800 |
Single Owner |
|
Goldin Financial Global Centre |
Kowloon East |
Goldin |
681,900 |
Single Owner |
|
2 Ng Fong Street |
Kowloon East |
Billion |
251,200 |
Strata-Title |
|
Hung Luen Rd. & Kin Wan St. (Two Towers) |
Kowloon Others |
Wheelock |
477,600 |
Strata-Title |
|
On Kwan Street & On Muk Street |
Kowloon Others |
Billion |
281,600 |
Strata-Title |
|
Sub-total: |
2,573,000 |
||||
2017 |
4 Yip Fat Street & 8 Heung Yip Road |
Hong Kong South |
SHK |
117,600 |
Strata-Title |
Asian House Redevelopment |
Wan Chai/Causeway Bay |
Chinachem |
236,000 |
Single Owner |
|
Somerset House Redevelopment |
Hong Kong East |
Swire |
928,200 |
Single Owner |
|
New World Centre Redevelopment |
Tsim Sha Tsui |
New World |
637,100 |
Single Owner |
|
Sheung Yuet Road & Wang Tai Road |
Kowloon East |
Pacific Investment |
233,100 |
Single Owner |
|
Wang Chiu Road & Lam Lee Street |
Kowloon East |
Swire |
499,300 |
Single Owner |
|
180 Wai Yip Street |
Kowloon East |
SHK & Wong’s |
383,400 |
Strata-Title |
|
On Yiu & On Kwan Street |
Kowloon Others |
Billion |
344,300 |
Strata-Title |
|
Sub-total: |
3,379,000 |
||||
2018 |
Sunning Plaza Redevelopment |
Wan Chai/Causeway Bay |
Hysan |
317,200 |
Single Owner |
15 Middle Road Carpark Redevelopment |
Tsim Sha Tsui |
TBC |
254,800 |
Single Owner |
|
Wharf T&T Square Redevelopment |
Kowloon East |
Wheelock |
447,000 |
Strata-Title |
|
Hang Yip St. ,Yan Yip St. & Kwun Tong Rd. |
Kowloon East |
Mapletree |
528,200 |
Single Owner |
|
CSW Post Office Redevelopment |
Kowloon West |
First Group |
135,500 |
Single Owner |
|
Sub-total: |
1,682,700 |
||||
Grand Total: |
10,757,600 |
||||
*Note: The expected timeline is subject to changes |
III. MAIN STREETS RETAIL LEASING TRANSACTIONS
Date |
Tenant |
Location |
District |
Area (sq ft) |
Retailer Type |
2Q |
Currency Exchange |
Cannon Street |
Causeway Bay |
50 |
Currency Exchange |
2Q |
Prince Jewellery & Watch |
Kai Chiu Road |
Causeway Bay |
400 |
Watch & Jewellery |
2Q |
Esprit |
Leighton Road |
Causeway Bay |
7,000 |
Fashion |
2Q |
Pandora |
Queen’s Road Central |
Central |
2,400 |
Accessories |
2Q |
Esprit |
Queen’s Road Central |
Central |
17,900 |
Fashion |
2Q |
Chow Tai Fook |
Haiphong Road |
Tsim Sha Tsui |
1,600 |
Watch & Jewellery |
2Q |
Sulwahsoo |
Canton Road |
Tsim Sha Tsui |
700 |
Cosmetics |
2Q |
Chain Pharmacy |
Park Lane |
Tsim Sha Tsui |
700 |
FMCG |
2Q |
Swatch |
Sai Yeung Choi Street South |
Mongkok |
300 |
Watch |
2Q |
City Chain |
Sai Yeung Choi Street South |
Mongkok |
1,400 |
Watch |
1Q |
Standard Chartered Bank |
Russell Street |
Causeway Bay |
5,700 |
Banking |
1Q |
Tsui Wah |
Lockhart Road |
Causeway Bay |
8,000 |
Catering |
1Q |
Samsung |
Des Voeux Road Central |
Central |
6,000 |
Electronics |
1Q |
Marks & Spencer Food |
Hollywood Road |
Central |
4,600 |
Grocery |
1Q |
Luk Fook |
Canton Road |
Tsim Sha Tsui |
1,900 |
Watch & Jewellery |
1Q |
ISA |
Carnarvon Road |
Tsim Sha Tsui |
10,800 |
Fashion |
1Q |
Innisfree |
Granville Road |
Tsim Sha Tsui |
1,000 |
Cosmetics |
1Q |
Chow Tai Fook |
Sai Yeung Choi Street South |
Mongkok |
4,800 |
Watch & Jewellery |
1Q |
Chain Pharmacy |
Soy Street |
Mongkok |
900 |
FMCG |