Brighter Outlook for Office Market in 2015 While Retail Sector Stabilizes

HONG KONG, Jan. 15, 2015 /PRNewswire/ -- Cushman & Wakefield, the world's largest privately owned real estate services firm, today released a year-end 2014 update on the Hong Kong office and retail leasing markets and its outlook for 2015.

Office net absorption dropped to lowest level in more than 10 years; leasing demand and rents expected to slightly recover in 2015

Office leasing demand stayed subdued in 2014, owing to occupiers' intention to reduce office costs and still limited supply in most locations. The narrow rental gap between submarkets and high relocation costs were also contributing factors to low net absorption, which at 268,250 square feet (sf) was the lowest level in more than 10 years. By submarket, office demand continued to gain momentum in Greater Central through more new office set-ups and expansions along with sustained demand from PRC finance-related companies. Greater Central recorded 226,650 sf of net absorption, the highest among submarkets. In the fourth quarter of 2014, the serviced office operator Regus added to its offering in Greater Central by leasing a whole floor in AIA Central, a space that was released onto the market earlier in the year by RBS. Swiss bank UBS leased an expansion space in Two IFC, but the Prime A building and district also lost another banking tenant when Commerzbank leased a whole floor in The Lee Gardens in Causeway Bay.

The fringe-core submarkets of Wan Chai/Causeway Bay, Hong Kong East and Tsim Sha Tsui combined experienced negative net absorption of -156,200 sf in 2014, placing slight upward pressure on their respective availability rates. More tenants across these locations, and the wider market, are identifying ways to contain costs including shelving expansion plans, consolidating office space, or if financially viable, decentralizing their offices. Notable recent cases included Sony confirming its plans to relocate from the Gateway Tower 1 (38,119 sf net) to a whole floor in Exchange Tower (18,680 sf net) in Kowloon East. The overall Grade A office availability rate increased slightly by year-end to 5.7%, having reached its highest level since year-end 2010. Availability, which increased slightly due to softened demand, was also pushed slightly upward by the completion of one Grade A office building during the past three months. The Octagon, developed by K.Wah and located in Tsuen Wan, added 277,600 sf net to the Kowloon West submarket. After staying in the region of 7.0% over the past two years, availability rate in Greater Central dropped to 6.3% by the end of 2014.   

Overall Grade A office rents increased by 1.5% in the fourth quarter of 2014, but ended the year down by -1.2%. Rents across most submarkets were stable in 2014, neither up or down by more than 1.0%, but in Kowloon East rents dropped by 5.3% over the past 12 months. The drop was underpinned landlords' increased flexibility in the face of milder tenant demand and increasing competition from new projects. For 2015, we anticipate that rents in the district will further soften due to some more projects being completed and some large availabilities coming to the market.  Gary Fok, Executive Director, Commercial – Hong Kong, said, "While some uncertainties remain, we anticipate that a generally stronger local and global economy in 2015 will support a slight recovery in office demand, which along with limited supply in core and fringe-core submarkets, will underpin mild rent inflation. As office availability further moderates in Greater Central, we expect office rents in the district to realize their first period of sustained growth since 2011. In other locations apart from Kowloon East, we expect stable or mild rental growth, supported by limited supply and stable demand."  

Prime shop rents declined by 5% to 8% in 2014, linked to slower sales growth and brand expansion

In 2014, the retail market continued to be impacted by changes in tourist spending including a less robust appetite for luxury goods, while more recently, the Occupy Central movement dented both market sentiment and retail sales of stores within prime retail catchments. Although having turned more stable as of late, retail sales through November grew by a slight 0.2% year-on-year. Sales of watches, jewelry and valuable gifts dropped by 13.4% for the same period, having been largely impacted by a high comparison base caused by the 'gold rush' in mid-2013, but still indicative of lower spending on such goods.  

Cushman & Wakefield continued to witness slower expansion of brands and retailers within the city's prime retail catchments in 2014. While watch and jewelry retailers still predominate store fronts in these areas and the situation is unlikely to change for the foreseeable future, there is a growing presence of fashion and apparel, and beauty and cosmetic brands as the spending trend shifts toward fewer high-end purchases. Despite slower sales performance and the adverse impact of events like Occupy Central, Hong Kong's unparalleled position in the region and as a gateway to the Mainland market continues to bring new brands leasing prime street shops and flagships, but a slight slower pace as compared to previous years. Recent new flagship lettings include Baldinini (1,650 sf) along Queen's Road Central and La Perla (8,000 sf) on Russell Street. Meanwhile, due to an increasing number of visitors and strong local consumption, more brands are increasing their presence in periphery areas including non-core and suburban locations such as Shatin, Tsueng Kwan O and Tuen Mun.

Prime retail locations continued to experience slightly higher shop vacancy in the second half of 2014, owing to more selective retailer demand and landlords' high rental expectations. But in light of the situation, more landlords are showing increased flexibility to renew tenants at stable rents or a small discount to avoid their premises hitting the open market. Prime street shop rents dropped by approximately 3% quarter-on-quarter in the fourth quarter of 2014, and closed the year down by 5% to 8%. The decline was more accelerated in Causeway Bay and Central as compared to Tsim Sha Tsui, and was recently exacerbated by the Occupy Central protests. The decline of prime street shop rents will persist into 2015, but it remains unlikely that rents of the most prime locations will drop by more than 10% in 2015. Michele Woo, Executive Director, Retail - Hong Kong, said, "More tourists will continue to come to Hong Kong in 2015, supporting growth of the overall market. However, more Mainland Chinese are taking their luxury purchases to Europe and other destinations as they diversify their experiences and spending. This trend will continue to impact the higher-end of the Hong Kong market including rents of prime street shops, and lead to more moderate retailer expansion and sales performance than what we have experienced in recent years. As a result more brands and retailers are diversifying and seeking broader growth which is supporting more expansion in regional malls and suburban districts where the consumer base is large and growing."

APPENDICES

I.    GRADE A OFFICE LEASING TRANSACTIONS

II.    MAIN STREETS RETAIL LEASING TRANSACTIONS

About Cushman & Wakefield

Cushman & Wakefield is the world's largest privately-held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world's major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and assignments. Founded in 1917, it has 250 offices in 60 countries and more than 16,000 employees.  It offers a complete range of services for all property types, fully-integrated on a global basis, including leasing, sales and acquisitions, debt and equity financing, investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $4 billion in assets under management.  A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge. In Greater China, Cushman & Wakefield maintains seven market-leading offices in Beijing, Shanghai, Chengdu, Guangzhou, Shenzhen, Hong Kong and Taipei. More information is available at www.cushmanwakefield.com.