In an end of year review Cushman & Wakefield stated that softened demand for Grade A offices leads to rising availability and softening rents Grade A office submarkets showed varied, but also weaker performance in terms of demand from large occupiers and rents in the second half of 2013. Grade A office demand became more subdued with fewer new leases and expansions and remained concentrated on smaller-sized requirements.
Overall net absorption amounted to 399,700 sq ft in 2013, down by 36% year-on-year. In core submarkets, absorption was led by Wan Chai/Causeway Bay followed by Greater Central which recorded positive absorption of nearly 30,000 sq ft after the completion of The Forum Redevelopment project in 4Q 2013 that was fully pre-leased by Standard Chartered Bank. In Greater Central, in the absence of demand for prime space by major financials, leasing demand in 2013 has been primarily driven by PRC firms, law firms and other financial-related firms with small to medium-sized office requirements.
Grade A office availability continued to trend higher in the fourth quarter, reaching 5.4% or an increase of 0.4 and 1.1 percentage points q-o-q and y-o-y, respectively. With Greater Central availability remaining largely stable at around 7% during the year, availability increased due to slightly negative demand in Hong Kong East and Tsim Sha Tsui, and also new supply in Kowloon East and West. More new supply in 2014-15 means that these two districts will become more tenant favourable.
Overall Grade A office rents decreased by 1.4% q-o-q in 4Q 2013, but were up 0.6% on the year. Greater Central rents were stable in 2H 2013 and dropped by just 1.6% in 2013. Sluggish demand, which softened noticeably in the second half of the year, and also more new supply underpinned a drop in Kowloon rents in 4Q 2013 and we expect this trend to continue into 2014.
Gary Fok, Executive Director, Commercial – Hong Kong, said, “A rise in new supply in Kowloon East generated by the completion of several strata-title buildings and more investors putting their units up for lease due to an inactive investment market has begun to put downward pressure on rents in the district. With leasing demand expected to remain soft, we anticipate that rents will continue to undergo a mild correction of 8% in 2014 with more supply in 2015 turning the market clearly in favour of tenants. On the other hand, supply in core submarkets will remain extremely limited in 2014-15 and therefore we expect stable rents in Greater Central next year as office demand there gradually recovers but still remains susceptible to volatility in the financial sector and the global economy.”
Moderating retail sales growth impedes expansions; rising vacancies in non-prime locations
The retail market continues to benefit from strong inbound tourism growth and stable domestic consumption, but has experienced moderating sales growth in the second half of 2013 as more spending shifts away from ultra-luxury purchases. In the second half of 2013 through October, retail sales growth amounted to 7.2% year-on-year after robust performance during 1H 2013 which was spurred by a surge in gold and jewellery sales. While the shift in spending patterns of Chinese tourist arrivals has led to slower sales growth of high-end and luxury goods, it has put the retail market on a path to more sustainable long-term growth.
More middle-class visitors from the Mainland are generating an increase in spending on affordable luxury goods, middle to high-end fashion and daily necessities. In the face of the shifting market and extremely high rents, many luxury and international brands have become more conservative in their expansions. The market is seeing some more iconic brands venture into 2nd and 3rd tier street shop locations with lower rents and which attract a wider range of shoppers. One recent example is Ralph Lauren’s new store on Hollywood Road in Central. However, some landlords in these locations have started to become overly aggressive in their rental expectations due to the demand shift, resulting in higher shop vacancies.
Rents of prime locations in Central and Causeway Bay eased by 2% in Q4 2013; while prime locations in Tsim Sha Tsui and Mongkok saw stable to slight rental growth. Looking ahead to 2014, we anticipate that rents of prime street shops will drop across most locations, by up to 5% to 10% in Central and Causeway Bay with less downward pressure in Kowloon.
Elevated vacancies and the recent surge in rents will cause a slightly more accelerated adjustment in rents of some secondary locations. Michele Woo, Executive Director, Retail – Hong Kong, said, “We expect the market to pick-up during the holiday season and then continue to transition into a more sustainable growth phase in 2014. Domestic and inbound tourism spending will support healthy sales growth and the market will continue to attract a growing range of new international brands.”