Slow IPO Market Impacting Leasing Momentum

• Slow IPO market in 1H/2023 negatively impacted Central office market, with only HK$17.8 billion raised marking a 20-year low.
• Insurance and hedge funds sectors thrive due to sustained interest from Mainlanders and fluctuating stock market respectively.
• Most companies remain cautious about expansion due to uncertain business prospects and high CAPEX.
• High specification offices with green building accreditations are in higher demand, while older buildings face competition from upcoming new supply.

Slow IPO market impacted Central office market
The slow IPO market in the first half of 2023 has negatively impacted the Central office market, with a 20-year low of HK$17.8 billion raised. This downturn meant less business prospects for investment banks and brokerage firms, many of which from Mainland with offices in Central. The above was evident by the high correlation of 0.62 between IPO fund raised and Central office rents over the past 15 years. However, a promising 55% rise quarter-on-quarter fundraising may signal a potential market recovery in the latter half of the year. Several notable companies, including SF Express, Lalatech (operator of Lalamove and Huolala), and Hema Xiansheng, are rumoured to be listing in Hong Kong, which could further boost this rebound.
 
Insurance and hedge fund sectors thrive in Q2
Despite the sluggish stock market, the insurance sector is thriving. Mainlanders' ongoing interest in purchasing various insurance policies in Hong Kong has allowed insurance giants such as AIA, Prudential, and Manulife to post satisfactory Q1/2023 results. This has led to a number of relocations and expansions within the insurance industry to capitalize on the rebounding insurance and asset management businesses.

The hedge fund sector is also expanding its office demand, benefitting from the fluctuating stock market. Examples include Man GLG taking up 4,000 square feet in Two IFC, the in-house relocation of Funde Asset Management in the same building, BGC Capital Markets taking up several units on two floors in AIA Central.

Office expansion challenges in uncertain business climate
However, most companies are still wary of expanding in the current uncertain business climate. Even with the availability of affordable rents in non-core areas, the cost-saving relocations are rare due to high fit-out and reinstatement CAPEX which could easily reach HK$1,500 per square foot. The amortization would still make a HK$20 per square foot rental savings but still unjustifiable on a 6-year lease term, not to mention these CAPEX had to be paid upfront. This is particularly evident with new office buildings in bare shell conditions that, despite offering modern specifications and attractive rental levels, are struggling to lease out their spaces. Fully-fitted office premised, on the other hand, were attracting considerable interests for the time being.

High-spec, green-accredited offices in demand over older options
Demand is higher for offices with superior specifications, better views or locations and green building accreditations, as multinationals with strict ESG requirements prioritize these features. Therefore, even there are more than 9 million square feet net of vacant office space in the market, the distribution of such vacancy is not even. As a new supply of 7.5 million square feet net is expected to enter the market, most of them are high-standard, green-accredited offices, tenants’ flight to quality would be expected, with these newly built eventually outcast their older counterparts.

Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “The slow IPO market further dampens business prospects of financial institutions, with slow take-up evident across all districts.”

Mr. Ricky Lau, Deputy Managing Director, Head of Office Leasing of Savills said, “Taking the above factors into account, we predict a decrease of 3% to 5% in office rent for the second half of 2023.”

Mr. William Yiu, Deputy Senior Director, Kowloon Office Leasing of Savills said, “Older buildings will need to offer more attractive rental packages and CAPEX subsidies or shift their focus to cater more service trades like beauty and medical to remain competitive.”