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Grade-A office vacancy rate hit extremely low level of 1.7% over Hong Kong

19 October 2015

Knight Frank launches the latest Hong Kong Monthly Report. The Grade-A office market did not see many activities last month despite robust demand due to an extremely tight supply situation, with the overall average vacancy rate reaching as low as 1.7% in September. The residential market saw more secondary homeowners slashed asking prices to boost sales, amid fierce competition from the primary sector and a potential interest-rate rise. The retail market remained subdued, but there were signs of stabilising with space being quickly snapped up given rental discounts.

Despite strong leasing demand, the Grade-A office market was stable last month amid limited available space, particularly in core business areas. Most firms opted for renewing their leases rather than relocation due to a lack of alternatives. The key demand drivers remained Mainland Chinese firms, which continued to favour Central for setting up offices. 
Looking ahead, David Ji, Director, Head of Research & Consultancy, Greater China at Knight Frank said given sustained demand and low vacancy rates, we remain positive towards the long-term outlook for Grade-A offices in Hong Kong. We expect rents in Central to increase 10% this year and another 5% in 2016. In Kowloon East, Grade-A office rents could drop 0-5% next year with increased supply.
According to the Land Registry, residential sales rebounded 9.4% from August to 4,263 in September. First-hand transactions jumped 110%, while secondary sales declined 15%, month on month (MoM). Both demand and supply remained robust in the primary market, with around 360 units launched during the Mid-Autumn Festival holiday. In contrast, the secondary market remained subdued last month, amid the recent stock market volatility, a potential interest-rate rise in the US and fierce competition from primary developments.
A minor interest-rate hike is not expected to lead to a significant default risk. On the other hand, market views do not expect a drastic interest-rate hike this year.
The total retail sales value in August decreased 5.4% year on year (YoY) to HK$37.9 billion with slower inbound tourism. Total visitor arrivals in August decreased 6.6% YoY, more than the decline of 2.9% in July.
Prime street shop landlords were under pressure in rental negotiations. For instance in Causeway Bay, a number of tenants in Russell Street reportedly received over 30% rental concessions on lease renewal. 
Having dropped about 10% during the first three quarters, rents of prime street shops are expected to drop further this year. However, there are signs of stabilisation as spaces are usually snapped up quickly provided discounts are offered. The recent rental corrections will bring new tenants to and promote diversity in prime streets, changing the landscape and benefiting the future local retail market in the longer term.