Central's Vacancy Rate Jumps to 8.3% in Q3 Amidst Continuous Overall Rental Drop

• The third quarter saw further office rental declines across all districts ranging from -0.4% to -3.4%
• Vacancy now stands at 10.2% with notable pockets of availability appearing in Kowloon East (14.4%) and Central (8.3%)
• The effective closure of the border with mainland China has cooled demand from Mainland businesses, whereas demand is modestly emerging from areas including ESG firms, Fintech, cryptos and NFTs / art auctioneers, to name a few
• By comparison, Hong Kong is still an expensive place to do business compared with many of our neighbours, and the recent relocation of Hong Kong firms or departments to Singapore helped lift rental levels in the country.

Rents down by 30% from peak in 2019

The third quarter saw further rental declines across all districts ranging from a relatively modest -0.4% in the Western Corridor (Cheung Sha Wan / Kwai Chung / Tsuen Wan) to -3.4% in Island South. Central's rents dropped to HK$102.5 per square foot net effective per month, which is 33% down from its previous peak in 2019, in line with the decline by around 30% for the overall rents.

Vacancy close to GFC levels

Vacancy now stands at 10.2% (6.5 million square feet net) with notable pockets of availability appearing in Kowloon East (14.4% / 1.9 million square feet net) and Central (8.3% / 1.3 million square feet net). In some districts vacancy is close to or above the levels during the Global Financial Crisis from 2009.

New players emerge while Mainland demand eases

The effective closure of the border with mainland China has cooled demand from Mainland businesses which is still below 2018 levels. Prime movers are businesses involved in private funds or asset management, securities, banking, real estate and insurance. Demand remains heavily core focused and in Central Mainland businesses now occupy around 25% of all Grade A office space while that figure is significantly higher in Sheung Wan at 35%. Buildings with the highest PRC occupancy are all Mainland owned.

Meanwhile, demand is emerging modestly from several other areas including ESG firms, Fintech, cryptos and NFTs / art auctioneers, medical services, government and public bodies, and private members clubs. We are still seeing take-up from serviced office operators but after aggressive growth since 2021 this has fallen back recently.

The regional picture

In a regional context it is worth noting that Hong Kong is still an expensive place to do business compared with many of our neighbouring cities. Savills own data on the cost of renting prime-prime offices put Hong Kong well ahead of its closest rival, Tokyo. The recent relocation of some of the Hong Kong or MNC businesses to Singapore partially helped raise the overall CBD Grade A office rents in the Lion City in Q3/2022 by 0.3% quarter-on-quarter, together with inflation forcing up conservancy charges. The increase has been more for the Grade AAA sub-group – where tenants who relocated from Hong Kong to Singapore are most likely to be found – which registered a 0.9% rise.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Although the border closure and weak stock market have hindered further expansion by Mainland companies, we still see modest demand from ESG firms, Fintech, cryptos and NFTs / art auctioneers, medical services, government and public bodies, and private members clubs."

Mr. Ricky Lau, Deputy Managing Director, Head of Office Leasing of Savills said: "The rising fit-out and reinstatement costs have become a major hurdle for tenants looking to relocate. Landlords are responding slowly by offering larger rent-free periods or even CAPEX subsidies in some rare cases. For smaller tenants, fully fitted units are particularly appealing in today's market"

Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing of Savills said: "Against a background of slowing economic growth and ongoing COVID restrictions, we expect demand to remain lacklustre over the final quarter of 2022 and vacancy can be expected to tick up into next year as new supply is added to the market."