‘Flight to quality’ of tenants is ‘absolutely going to continue’ with lots of new supply hitting the market, a property agency says

Hong Kong office landlords are increasingly in a “defensive” position amid a supply glut that is driving tenants to upgrade to better and cheaper locations and facilities, according to analysts.

“The flight to quality of existing tenants within Hong Kong is absolutely going to continue with all the new supply coming in the next three to four years,” an agent said. “We will see downward rental pressure on grade B and grade A-minus office space. Our forecast is a 5 to 10 per cent decline in office rents this year.”

Some 3 million sq ft of new premium office space is expected to enter the market in coming months – the biggest net increase in supply in 17 years. Sun Hung Kai Properties’ International Gateway Centre project in West Kowloon will contribute 2.6 million sq ft of that.

Given the many options available to office tenants, landlords have been extending incentives to keep them or help them relocate within their properties, the agent said. Office vacancy rates were projected to rise, he said.

Flight to quality meant different things to different firms, the agent said, including better transport connectivity, improved ESG (environmental, social and governance) partnerships with landlords and larger floor plates.

Incentives landlords are offering include lower rents and lower capital expenditures for new office fit-outs.

In Central, law firm Holman Fenwick William (HFW) relocated to a 22,000 sq ft space in Alexandra House this month, leaving its office in Lippo Centre in Admiralty after 30 years. It was one of the largest office leasing deals in the city’s main business zone in the past 12 months, according to developer and landlord Hongkong Land.

“We have ambitious growth plans in Hong Kong, and although our previous premises had served us well for almost three decades, we needed an office with sufficient space to support that growth,” said Peter Murphy, managing partner in HFW’s Hong Kong office.

“After consulting with all our people, we took the opportunity to upgrade to a new state-of-the art working environment that should benefit our teams and our clients, and should support our longer-term strategy for Hong Kong and the region.”

With its roots in the insurance industry in 1832 in England, HFW came to Hong Kong in 1978 as one of the first UK-based law firms to expand internationally.

Despite weak demand in the office property market, Hongkong Land said the deal was “completed at market rates and is a long-term commitment by HFW to core Central”.

“It is not about cost reduction,” said Neil Anderson, director and head of the office of commercial property with the developer. “HFW’s recent move to Alexandra House, after more than four decades in the city, is a prime example of the ‘flight to quality’ trend in the market as corporates look for high-quality spaces and services in the heart of Hong Kong.”

In January, the overall office vacancy rate rose to 13.3 per cent from 13.2 per cent in December, according to the property agency. Overall prime office rents dropped 0.2 per cent month on month, the agency said.

“In 2025, the Hong Kong office market is expected to face a high vacancy rate due to the delivery of new development,” another property agency said in a recent report. “We believe the pace of market recovery will depend on various factors, including economic conditions and government policies.”