Hong Kong’s notoriously pricey office rental sector is fast becoming a tenants’ market as last year’s protest movement and the current coronavirus pandemic have prompted struggling companies to bail on their leases.
A huge increase in firms, from co-working space providers to finance companies and retailers, abandoning their offices before the contracts expire has helped free up space and contributed to a fall in rental rates.
“Given that real estate is one of the single largest costs in operating a business, particularly in Hong Kong, lease surrender cases are becoming more prevalent as a means to generate savings,” said Chris Cohen, a data analyst at Savvi, a Hong Kong-based data-driven real estate platform founded in 2018 that specialises in office, off-market and lease surrender opportunities.
Office rents across the city have been falling hard this year, with vacancy rates in areas such as Admiralty and Central soaring as the health crisis further saps demand already dented by months of social unrest. Many analysts see the situation worsening this year.
Companies that surrender space have typically overextended themselves through expansion or “are currently paying market-peak rentals in what is one of the world’s most expensive office markets,” said Cohen.
Firms that gave up office space this year were predominantly mainland Chinese ones and those whose businesses were hit particularly hard by the virus and last year’s social unrest, such as retailers, according to Wendy Lau, senior director of Hong Kong office services at Knight Frank.
Sometimes the rental contract can be broken legally if tenant and landlord reach an agreement on terms, which might include compensation.
“If their business or operation is affected, they will consider cost-saving exercises more seriously”, which may include surrendering some office space, added Lau.
“They either cut the size or move to cheaper places. Surrender means they would seek replacement [tenants] during the lease,” added Lau.
The number of so-called surrendered listings for Hong Kong office space in the first three months of 2020 was double that for the whole of last year, according to Savvi, which cooperates with landlords, agents and tenants to deliver property services in cities including New York, Singapore and Shanghai. Savvi says it has a network of more than 10,000 tenants, giving it access to a large amount of listing data.
Hong Kong Island alone has recorded 500,000 to 600,000 sq ft of surrendered listings so far this year, almost twice the 250,000 to 350,000 sq ft during the whole of 2019, the company said. The 600,000 sq ft is equivalent to the size of 9.3 standard football pitches measuring 6,000 square metres each.
The amount of space vacated in the first three months has been almost 10 times the quantity in the same period last year by square footage, said Cohen.
“We anticipate a month-on-month increase of 20 to 30 per cent in surrender and upcoming lease listings ... for at least the next three months,” he added.
Reasons for surrender, which can release tenants from their existing lease obligations, include restructuring, downsizing, insolvency, merger and acquisition, or even expansion.
“It is also in pressing times, due in part to the months of social unrest and the current Covid-19, that businesses are forced to think outside the box,” Cohen said. “Landlords’ sentiment is also changing, and some are facilitating surrender cases within their portfolio, as a last resort.”
Since many surrender listings are also handled off-market or on a confidential basis, the jump may actually be greater than the figures suggest.
Recent cases of surrendered office space have been seen in some of Hong Kong’s busiest commercial zones, including Central, Admiralty, Tsim Sha Tsui and Causeway Bay.
Co-working operator WeWork last month surrendered 30,000 sq ft on two floors at Hysan Place, Causeway Bay, and 120,000 sq ft at The Gateway in Tsim Sha Tsui, according to market sources. WeWork was paying a monthly rate of about HK$100 (US$12.89) per square foot at Hysan Place and about HK$60 per square foot at the Gateway. The leases were signed only last year.
“At the moment, we are focusing on our top priority of ensuring members across the world have a safe workplace environment,” WeWork told the Post in an email last week, referring to the Covid-19 pandemic.
CreditEase, a fintech company from mainland China, surrendered its office in the International Financial Centre, measuring about 5,000 sq ft, last month. It was leased at about HK$170 per square foot, according to market sources. The lease was supposed to expire in the third quarter of 2021. CreditEase did not respond to repeated requests for comment.
“As the Covid-19 outbreak has been declared a pandemic, this will inevitably exacerbate market volatility and negative sentiment,” said Martin Wong, associate director of research and consultancy at Knight Frank. “The office market will be significantly dampened in the near term.”
The vacancy rate was the most serious in Admiralty at 6.1 per cent in February, the highest since April 2014, with almost one in five floors of Bank of America Tower empty, according to Centaline Commercial.
Average rents for offices in Admiralty sank 22.6 per cent on the year to HK$90.1 per square foot in February, according to Knight Frank.
The average Hong Kong office rent will slide to HK$60.6 per square foot in 2021, down 16.8 per cent from last year, as the market “transitions to a tenant-friendly” one, according to a report by Cushman & Wakefield.
Rents in Central contracted by 3.2 per cent month on month to HK$116.1 per square foot in February, the sharpest monthly decline since the financial crisis of 2008, said Nelson Wong, head of research at JLL in Greater China.
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