Cost-Saving by Multinationals Fails to Dent Demand for Grade A Office Space in Hong Kong
Cost-Saving by Multinationals Fails to Dent Demand for Grade A Office Space in Hong Kong
November 29, 2016
Total Occupied Space Increased by 4.1m sq. ft.; Rents Rose 10% in Last Three Years
Hong Kong, November 29, 2016 – Large multinational companies may be the traditional occupiers of Hong Kong's Grade A offices, but they have increasingly opted for less costly office space in recent years, according to new research report from CBRE, The Evolution of the Hong Kong Grade A Office Market – a Telescopic Analysis. However, this has not reduced demand for Grade A office space overall, with total occupied space reaching 71.6 million sq. ft. during the three-year period of the study (March 2013-March 2016) – an increase of 4.1 million sq. ft.. Rents for Grade A offices rose by an average of 10% over the same period.
By submarket, demand for space was particularly strong in the Central CBD. The vacancy rate in Greater Central (Core Central, Admiralty and Sheung Wan) fell from 4.7% to 1.4% during the study period, while rents increased by 16%. Similar vacancy trends were also observed in other submarkets, although rents elsewhere have risen by less than in Central.
“While demand levels in the Hong Kong Grade A office market remained healthy during the study period, this rosy picture was not painted equally by all industry sectors, with some growing rapidly in terms of space requirement while others reduced their footprints,” said Marcos Chan, Head of Research, CBRE Hong Kong, Southern China and Taiwan.
“We have observed a very uneven pattern of expansion between companies headquartered in different markets. On the one hand, many multinational companies are managing costs and choosing more affordable solutions in decentralized offices. On the other, we saw an increase in demand for premium Grade A offices from mainland Chinese firms, particularly in the CBD,” said Rhodri James, Executive Director, Advisory and Transaction Services – Office, CBRE Hong Kong.
Major Trends During the Study Period
The Growing Importance of Chinese Enterprises
By the end of March 2016, about 10% of Hong Kong’s occupied Grade A office space was occupied by enterprises from China. This involved a total of 7.2 million sq. ft. of space, equivalent to a 1.2 million sq. ft. net gain in occupancy between March 2013 and March 2016, compared to the 4.1 million sq. ft. growth in total occupied space across Hong Kong. The same period saw US/European firms contract by 199,000 sq. ft. across the overall market. Banking and finance firms accounted for the majority of this increase. The rapid expansion of mainland Chinese firms is set to continue in the coming years, supported by the extension of bilateral financial sector policies between Hong Kong and mainland China.
Decentralization to Reduce Occupancy Costs
Escalating rents and tight space availability in core office areas has prompted many occupiers to adopt a strategy of decentralization of their office space. Currently, Hong Kong East is the preferred submarket for Hong Kong Island occupiers looking to decentralize, but Kowloon East is likely to present a viable alternative in future: The district is set to benefit from the completion of a number of infrastructure projects currently under construction. Average rents in Greater Central are approximately 2.2x and 3.3x higher than Hong Kong East and Kowloon East, respectively.
Strong Owner-Occupier Demand
In addition to leasing demand, large corporations have displayed a robust appetite for en bloc purchase opportunities over the past three years. Between March 2013 and March 2016, a total of five office buildings were purchased by corporate end-users, involving a total investment of HK$38 billion. Of these transactions, all were Grade A buildings. Demand has been led by Chinese corporations: three of these five en bloc transactions involved Chinese corporate buyers. In most cases, the buyers retained at least part of the building for self-occupation.
Overview by Sector
Banking & Finance
By sector, banking & finance companies are at the forefront of demand, expanding their total occupied space by 1.3 million sq. ft. over the study period – the biggest increase of any industry sector. Banking and finance firms now occupy 26% of all of Hong Kong's occupied Grade A office space, equivalent to 18.6 million sq. ft. However, this increase in demand from banking and finance sector tenants varied by nationality of company, with a clear divergence in appetite between Western and Chinese financial institutions. While US/European financial firms have contracted by 405,000 sq. ft. across Hong Kong in the study period, Chinese financial firms have expanded by 690,000 sq. ft.
Most large insurance companies have expanded due to strong sales growth in recent years, and CBRE Research found that the insurance sector grew by 722,000 sq. ft. in terms of total occupied Grade A office space during the study period. By percentage, the sector recorded the biggest percentage increase of any industry, up 19%. However, insurance companies will likely adopt a more cautious approach towards expansion in the future as sales may decelerate if the Chinese government further curbs offshore policy purchases.
Real Estate & Construction
In the three years to March 2016, real estate and construction firms increased in size by 558,000 sq. ft., boosting the sector’s total footprint to 5.6 million sq. ft. As the fourth-largest occupier group in the Hong Kong Grade A office market, the growth of the real estate and construction sector in terms of total occupied space has been driven mainly by demand from co-working space and serviced office operators in Hong Kong's Grade A office market. These operators cater primarily to start-ups, SMEs and firms requiring temporary offices. Collectively, they increased their footprint by 193,000 sq. ft. to reach 709,000 sq. ft. during the study period.
Logistics & Trading
At the other end of the spectrum, logistics & trading as a sector contracted the most by occupied space, shedding 16% (or 1.3 million sq. ft.) of its Grade A office space since 2013. Weak global trade and declining local retail sales have created headwinds for related trades such as third-party logistics, shipping companies and trading firms, resulting in weaker demand for office space.
Retail & Wholesale
Retail consumption has weakened considerably over the past three years, forcing retailers and wholesalers to adopt more prudent real estate strategies both for their shops and offices. Total retail sales declined by 4% between 2013 and 2015 and retailers' and wholesalers' Grade A office footprint also contracted by 4%, equivalent to 240,000 sq. ft., by March 2016, when the sector's total occupied space stood at 5.6 million sq. ft..
“Broadly, we expect the trends of the past three years to continue in the near-term,” said Marcos Chan. “Chinese firms will keep growing their Grade A footprint and absorbing space being returned by Western companies. For such companies, cost saving will also remain a key theme for the foreseeable future – particularly among those in struggling sectors such as retail & wholesale as well as logistics & trading. New office demand from non-existence mainland Chinese banks, fund houses, securities firms and wealth management companies is estimated to be 1.8 million sq. Ft., to be gradually realised in the next few years. There will also be expansion demand from existing companies. Chinese developers’ growing exposure to the property development market in Hong Kong will also result in increased office demand. Expansionary demand from top-tier Chinese property developers is expected to be circa 300,000 sq. ft.. While Hong Kong’s Grade A office market is not without challenges, we do not foresee major over-supply risks in the next five years, as the annual supply of new Grade A space between 2016 and 2020 will be around 20% lower than the long-term average.”
The CBRE Research study, entitled The Evolution of The Hong Kong Grade A Office Market: A Telescopic Analysis, examined the occupancy structure of each of the 200+ Grade A office buildings in Hong Kong at the end of March 2013 and again at the end of March 2016. The report's findings and conclusions were arrived at through a comparative analysis by building, floor and subdivided unit.
Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.
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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.