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
Facebook
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