Only Hong Kong East defied the rental downturn in Q3.
Greater Central rents fell 3.2% in Q3, the largest quarterly drop since 2012, and is set to fall between 6-8% in 2019, according to Cushman and Wakefield (Cushwake).
Pre-leasing transactions agreed well before the social unrest contributed to an overall positive absorption, but in general tenants held off relocations or expansion. As a result, availability in Greater Central rose to 7.4% in Q3, the highest level in 14 years, reported Cushwake.
Net absorption in the Grade A office market fell from 513,697 sq ft in Q2 to 295,214 sqft in Q3. Most transactions were concentrated in non-core areas such as Hong Kong East, where WPP leased 111,000 sq ft in K11 Atelier on King’s Road.
Also read: Grade A office net absorption slumps to 139,500 sqft in June
“We expect demand to drop considerably in Q4 with net absorption for 2019 falling to less than half the level last year,” commented Keith Hemshall, Cushman & Wakefield’s Executive Director, Head of Office Services, Hong Kong.
Net effective office also rentals dropped for the second consecutive quarter to HK$74.7 per sqft (psf) per month, down 2% QoQ. Most sub-markets experienced rental declines in Q3, led by Greater Central. The only exception was Hong Kong East where rentals edged higher by 0.3% QoQ.
“As sentiment in the office market has soured considerably in Q3 and with no end yet in sight to the current instability, rents across all sub-markets will come under increasing pressure over the remaining months of this year and into 2020. Our forecasts are for rents in Greater Central to fall by between 6% and 8% this year and by between 8% and 13% next year,” said John Siu, Cushwake’s managing director, Hong Kong.
As retail sales dwindled in August, retail rents in both core and non-core areas declined in Q3, led by a 7% drop in Causeway Bay which took the hardest hit from the declining numbers of tourists and interruptions to business due to the social unrest. With tourist arrivals expected to remain muted in Q4, forecasts for rents in Causeway Bay in 2019 to fall between 11% and 13% for the year as a whole.
F&B spending also decreased. As of September (estimation), business for Chinese restaurants was down by 10-12% and non-Chinese restaurants down by 5-7%, while the fast food and drinks sector maintained a growth of 1-4%. This resulted to F&B rents dropping between 3% and 4.1%, with Causeway Bay suffering from the sharpest drop.
“It is a hard time for retailers and the dismal market sentiment will continue into the next quarter, as a solution to the current social quagmire is not yet in sight. However, trades that focus on mass market demand and local consumption should fare better, such as the sports/athleisure and education sectors, should fare better in the current environment,” said Kevin Lam, Cushwake’s executive director, head of retail services, Hong Kong.