Grade A office rent in Central is down for the fourth year in a row since 2019, as Hong Kong’s initial public offerings (IPO) market struck a 20-year low

Robust demand from the insurance sector and a strong IPO pipeline has brightened the outlook for the second half of the year

A slowdown in public markets has tapped the brakes on office leasing momentum in Hong Kong, but a turnaround in deal activity, with a boost from several blockbuster listings which are in the pipeline, may improve performance in the second half of the year, according to a real estate firm.

Office rents in the city’s business district saw a decline in the January-June period as the initial public offerings (IPO) market struck a 20-year low with just HK$17.8 billion (US$2.2 billion) raised, according to the agency’s research.

Grade A office rent in Central is down for the fourth year in a row since 2019, according to the agency.

“The slow IPO market further dampens the business prospects of financial institutions, with slow take-up evident across all districts,” the agent said.

This especially affected banks and brokerage firms from mainland China with offices in Central, according to the report.

However, there are signs of a potential market recovery in the second half of 2023 for IPOs as the strong sequential rise of 55 per cent in the second quarter is seen extending its run.

Several notable listings are in the pipeline and this could lift the overall market sentiment in Hong Kong. Those include logistics company SF Express, which plans to raise some US$3billion in a share sale.

Elsewhere Lalatech, the operator of Lalamove and Huolala, filed for an IPO in March and Alibaba Group Holding has also said it will move ahead to list two of its units: its supermarket chain Freshippo and its logistics arm Cainiao.

“The IPO pipeline continues to be stable with over 110 active applicants, which is more than enough to fuel a rebound in the second half of 2023,” said Irene Chow, partner at consultancy KPMG. “We anticipate more specialist technology companies to appear in the second half of 2023.”

Drawn to the city’s volatile stock markets, hedge funds are lining up for office space, the agency said with Man GLG securing 4,000 sq ft of office space in Two International Finance Centre . It is the discretionary investment unit of the world’s largest publicly traded hedge fund.

Meanwhile, Chinese fund Funde Asset Management has also relocated to Two International Finance Centre Bui and US brokerage BGC Capital Markets has occupied multiple units across two floors in AIA Central , the agency said.

The insurance sector, which saw a boom in the first half, also stimulated the market, propelled by AIA subsidiary Blue Cross’s leasing of a 30,400 sq ft office space at Hopewell Centre in Wan Chai.

The insurance sector has seen a 70 per cent surge in office space demand compared with last year and now accounts for 12.5 per cent of the total market, another agency said in late July.

Still, many corporate tenants remain cautious due to the overall uncertain business climate, and this is putting downward pressure on rents. Office rents are expected to decrease 3 per cent to 5 per cent in the second half of 2023, the agent said

The softer demand is reflected in the overall vacancy rate, which rose to 13.5 per cent in the second quarter from 13.4 per cent in the previous quarter, with the 22.2 per cent vacancy rate of Kowloon East a stand-out.

High-specification, green-accredited offices are in demand, particularly among multinational companies which have strict environmental, social, and governance (ESG) requirements, the agency said.

“Looking ahead, with another 7.5 million sq ft net of new supply in the pipeline, most of them built to the highest standards with ample green features and accreditations, we would expect tenants’ flight to quality,” the report said.