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Hong Kong Grade A Office Rents in Mild Downwards Adjustment in Q1 2022


Activity Expected to Rise in 2H 2022 

  • Supermarkets, medicines & cosmetics saw positive growth amid retail market’s slowdown
  • Short-term retail leases in high demand
  • Consumption Voucher Scheme roll-out expected to boost retail spending
The fifth wave of COVID-19 stalled the recovery of leasing activities and dragged rental levels downwards in the Hong Kong office and retail markets, from the second half of Q1 2022. Despite this, the overall Grade A office rental level dropped by less than 1% q-o-q. With the pandemic situation gradually calming, and with new development projects due to complete, we expect the office leasing market to regain momentum in the second half of the year. In the retail market, sales in the first two months of 2022 dropped to a record low since the beginning of the pandemic, subsequently pulling down rents in the major retail districts by 3% q-o-q. However, with social distancing measures set to be progressively eased, and combined with the beneficial knock-on effects of the new round of the Consumption Voucher Scheme, retail leasing activity is expected to recover after Q2 2022.
Office market: slight rental decline, positive net absorption for three consecutive quarters
Office market rents demonstrated stable overall performance in January 2022. As the pandemic situation became more severe in February, leasing activities substantially slowed, with overall rents dropping by 0.9% q-o-q and 3.1% y-o-y. By submarket, Hong Kong East and Hong Kong South experienced notable drops in rental levels, falling by 2.2% and 1.5% q-o-q, respectively. Nonetheless, the pandemic is expected to come under control, with social distancing measures set to be eased progressively. Given that office rental levels have now dropped at around 27% from the peak of 2019, we expect that there is little room for further steep falls. We now anticipate a downward adjustment of 50 to 100 bps in Q2 2022, followed by a gradual recovery of leasing activities in 2H 2022 with subsequent stabilization in rental levels.
Chart 1: Hong Kong Grade A office rental comparison

Hong Kong Grade A office rental comparison

In terms of absorption, a number of leasing transactions were recorded in the first half of Q1. However, the subsequent tightening of anti-pandemic measures suspended site inspection activities by landlords and tenants, resulting in fewer transactions. Overall, the city recorded positive net absorption over three consecutive quarters as of Q1, amounting to 245,100 sf. The banking & finance sector accounted for the lion’s share of new transactions in Q1, at 34.7%, followed by consumer products & manufacturing at 12.8%. The government and transportation & logistics sectors were more active than previously. With a new project in the pipeline in Q1, overall availability was maintained at 13.6%.
Chart 2: Hong Kong Grade A office net absorption

Hong Kong Grade A office net absorption

John Siu, Managing Director and Head of Project & Occupier Services, Hong Kong, Cushman & Wakefield stated, “We estimate total net absorption of 300,000 to 500,000 sf in 2022, with the banking & finance sector leading demand for office space, while the professional services and logistics sectors will also remain active. From the supply perspective, three flagship projects in non-core areas are due to complete in 2H 2022, bringing 2.3 million sf of new floor area to the market. We believe these new completions will help fuel office expansion and relocation, although the influx of space will inevitably ramp up the overall availability rate to around 16% to 17%.”
Chart 3: Hong Kong new leasing transactions by sector

Hong Kong new leasing transactions by sector  

Retail market: supermarkets and the medicine & cosmetics sector show positive growth
As the city braced for the fifth wave of the pandemic, caution and protective measures prompted widespread curtailment of consumption and resulted in an inactive retail market. In January and February 2022, total local retail sales fell by 4.9% y-o-y, with jewelry & watches (13.1%) and fashion & accessories (15.5%) dropping the most. On the other hand, supermarkets and the medicine & cosmetics sectors were beneficiaries, with retail sales growing by 8.2% and 5.0% respectively. The unfavorable factors have led to downward adjustments of retail rents in multiple districts, with drops ranging from 2.7% to 4.5%. As the pandemic situation gradually comes under control and social distancing measures are expected to be progressively relaxed, we now anticipate little room for further overall rent reductions, and the market is expected to gradually recover from Q3 2022 onwards.
Chart 4: Latest performance of Hong Kong retail sector

Hong Kong latest performance of retail sector

The F&B sector has suffered most severely from the fifth wave of the pandemic, subsequently seeing rental level falls of around 3% in multiple districts. However, with the gradual stabilization of the pandemic situation, combined with the expected relaxation of dining restrictions and a new round of the Consumption Voucher Scheme, we believe the F&B sector will be on the way to steady recovery.
Chart 5: Hong Kong F&B premises rental comparison

Hong Kong F&B premises rental comparison

Kevin Lam, Executive Director and Head of Retail Services, Agency and Management, Hong Kong, Cushman & Wakefield, highlighted, “Retail vacancy rates in key districts have been impacted by the pandemic to different extents. Mongkok and Tsimshatsui have suffered the most, with vacancy rates at 16.4% and 14.3% respectively. Responses from landlords can be broadly classified into three approaches. The first group prefers to leave the space idle, pending quality long-term tenants; the second tends to take a lease term of two to three years from large reputable brands; while the third group will lease the space to short-term tenants, such as those selling face masks and anti-epidemic products. In fact, short-term leases are better received by tenants, and so some landlords are willing to follow such market trends and accommodate lease terms accordingly.”
Click here to download photos and the presentation.
About Cushman & Wakefield 
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms in the world, with approximately 50,000 employees in over 400 offices and 60 countries. In Greater China, a network of 22 offices serves local markets across the region, earning recognition and winning multiple awards for industry-leading performance. In 2021, the firm had revenue of $9.4 billion across core services including valuation, consulting, project & development services, capital markets, project & occupier services, industrial & logistics, retail and others. To learn more, visit or follow @CushWake on Twitter. 

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