The narrowing decline in rents suggests the market is nearing a bottom, especially in prime locations, a property agent says

The decline in Hong Kong’s office rents slowed in the second quarter amid rising leasing demand from finance and law firms, but analysts cautioned this trend was unlikely to substantially benefit landlords as prices are yet to recover.

Overall grade A office rents fell 1 per cent quarter on quarter compared with steeper declines in earlier quarters, according to data from a property agency.

Prime Central, Tsim Sha Tsui and Kowloon West recorded a milder decline in rents than districts like Kowloon East and Causeway Bay, by up to 0.6 per cent quarter-on-quarter, the data showed.

“A narrower rental decline signals that the market may be approaching greater stability, which is encouraging for both landlords and investors,” a property agent said. “It suggests that rental corrections are slowing, and that we may be nearing a pricing floor, especially in prime locations.”

Office rents in Hong Kong have dropped by more than 42.8 per cent from a peak in 2019 due to a slump in the city’s real estate market, the agency said in a recent report. The monthly rent in Central, which has been historically known for having the world’s most expensive office rents, has dropped to HK$89.30 (US$11.40) per square foot from HK$166.10 per square foot in January 2019.

HSBC Global Research said in a recent report that the office market was picking up amid improving financial activity in Hong Kong, but the research arm of Hong Kong’s biggest bank expected downward pressure on rents to continue. It revised its full-year forecast for the office rent decline to 5 to 7 per cent from 7 to 10 per cent previously.

The improving stability was underpinned by stronger leasing momentum, especially from the banking, finance and insurance sectors, which were active in relocation and expansion activities, market observers said.

Last month, Henderson Land Development, one of Hong Kong’s largest developers, leased a 223,437 sq ft space in its prized under-construction mixed-use project in Central to Jane Street Asia in one of the largest leasing transactions in the city’s main business district in decades.

The rent for the space, across six floors in New Central Harbourfront, will be HK$137 per square foot per month, or HK$30.6 million per month, excluding fees. The transaction, which makes the quant-trading firm the anchor tenant of the development, is equivalent to 70 per cent of the office and ancillary portion of the first phase of the project.

In the second quarter, US equity firm Ares Management leased 24,800 sq ft at The Landmark-Gloucester Tower in Central. FWD Group, the insurer founded by tycoon Richard Li Tzar-kai, leased 107,700 sq ft in Devon House in Quarry Bay.

Hong Kong Island had shown greater strength in both net absorption and demand, according to the agency. “Looking ahead, we expect financial services and professional services to remain more resilient, particularly as Hong Kong’s IPO market regains global leadership, which should stimulate downstream leasing demand,” the agency said.

“For landlords, this creates an opportunity to retain tenants with competitive but not drastically reduced rents, while potentially attracting new occupiers looking to upgrade their premises,” the agent said.

Still, a smaller decline in rents would have limited impact on landlords as rental income was not improving overall, another agent said.

Another property agency said it expected rents on Hong Kong Island to drop 2 to 5 per cent, and between 9 and 11 per cent in Kowloon this year.

This could present significant challenges for Hong Kong’s commercial property owners, who face mounting liquidity pressures as high interest rates, plunging property values and declining rents severely strain their cash flow and debt-to-equity ratios.

Another property agency said apart from landlords, many investment funds and private investors were grappling with debt-related pressures. The agency estimated that nearly 10 million sq ft of grade A office space owned by distressed landlords was at risk, with some properties likely to be sold at discounts or even enter receivership.

It predicted a 5 to 10 per cent drop in office rents this year.

“While we acknowledge the recent uptick in leasing activity – the highest level since the Covid-19 era – we maintain a cautious outlook due to the high vacancy rate of 19.3 per cent and an abundant supply pipeline,” the agent said.

Hong Kong faces a glut of commercial space that may take between seven and 15 years to digest, according to experts. The city has 15 million sq ft of excess office space, more than all the current space in the main business district.

The agency said it maintained its existing forecast of a 7 to 9 per cent decline in office rents this year.

The continued pressure from supply and availability could outweigh the current leasing momentum, at least in the short term, it said.