The office market is under strain from weakening capital market activity and less leasing demand from mainland firms, S&P says

Overall grade A office rents dropped further in January, property agency said

Hong Kong’s grade A office rents will decline by another 5 per cent this year, as demand from mainland China-based companies has yet to return to pre-pandemic levels and vacancy rates remain high due to new completions, analysts said.

The decline will add to a 6.5 per cent drop recorded last year, S&P Global Ratings said.

“Hong Kong’s office markets are under strain from weakening capital market activities in the city and less leasing demand from mainland China companies,” the ratings agency said in a report on Monday.

The S&P forecast comes after the overall vacancy rate for grade A offices in Hong Kong rose to 12.9 per cent as of January end – it stood at 12.8 per cent in December 2023 – driven by new completions, according to a property agency. The vacancy rate in Central rose to 10.4 per cent in January from 9.9 per cent a month earlier.

“Overall net effective rents of grade A offices dropped further by 0.6 per cent month on month in January,” an agent said in a report on Tuesday. “Rents in Central and Hong Kong East dropped further by 1.2 per cent and 0.9 per cent, respectively.”

Chinese firms accounted for just 10 per cent of new leasing activity in 2023, down from 15 per cent to 20 per cent in 2019, according to another agency. Five new office buildings are scheduled for completion this year, and overall vacancy is forecast to rise above 17 per cent by the end of 2024.

“We expect the vacancy rate to remain relatively high at about 10 per cent for offices in the prime business district, known as Central,” S&P said. “And it would be even up to the high teens for the outskirts of Central or other business districts.”

Hopes are pinned on capital market activity, the ratings agency said. More leasing enquiries are likely this year as capital market activity revives, it added.

Hong Kong’s initial public offering (IPO) market will gradually stabilise this year despite geopolitical tensions and economic uncertainties globally, aided by listing reforms and potential interest rate cuts in the second quarter, PwC said. It forecast that 80 companies will list in Hong Kong this year, with fundraising set to exceed HK$100 billion (US$12.78 billion). Last year, fundraising in the city fell by 56 per cent, with 73 companies raising HK$46.3 billion.

To counter the impact of increased new office supply, office owners are quickly adapting to new green requirements to attract new tenants, S&P said.

“The increase in new office completions has been a driving force behind tenants seeking high-quality office spaces to enhance their working environment,” another agent said. “This trend has resulted in new buildings with reputable green certifications outperforming others in the market.

“We believe the upgrading demand will continue to drive the market this year.”

A major transaction recorded during the month was Franklin Templeton leasing 23,600 sq ft at Two International Finance Centre in Central, according to the first agency. The firm is relocating from Chater House in the same district.