As Hong Kong’s office leasing activity stutters, a renewed call to lift quarantine restrictions

LEASING activity has slumped to a new low in the posh, glass-windowed offices of Hong Kong’s pricey Grade A buildings, in yet another clear sign of the city’s slow climb back to its former glory as a financial centre.   

According to some industry analysts, one remedy that could deliver a quick boost to this lethargic industry – the phasing out of the punishing regimen of Covid-19 quarantine restrictions.  

Their comments came after the government’s recent move to shorten the compulsory 7-day hotel quarantine for all visitors to 3 days. In a research report, property consulting firm Colliers noted: “These measures are still stricter than Asian counterparts like Japan, South Korea and Singapore. For multinational corporations, Hong Kong becomes less favourable for the location of (their) regional headquarters.” 

It added: “In the meantime, there is a lack of clarity about precisely when quarantine-free travel will resume, which the recovery of leasing demand from (mainland Chinese) firms rests upon.” 

A Bloomberg article on Sunday (Sep 18) quoted a report by the Oriental Daily newspaper saying that Hong Kong could detail plans to end hotel quarantine for inbound travellers. The announcement could come as soon as this week with arrivals instead required to undergo self-monitoring for 7 days.

Alex Barnes, the managing director at consulting firm JLL in Hong Kong, said in a statement: “It would bring breakthrough demand to the office leasing market if the local government removed quarantine completely.”

The local research team at the CBRE Group also expects that “travel normalisation, when it occurs, will fuel space demand from multinationals and mainland Chinese firms”.

Mainland Chinese firms have acted as an anchor for Grade A offices in Hong Kong over the years. A total of 1,161 of these firms account for a 13.5 per cent market share, about the same as the levels seen in 2019, before the pandemic struck.

CBRE, however, also tempers optimism with caution, projecting future demand growth in the 3 years to 2025 to be “gradual and moderate”, with some multinationals continuing to downsize. That is the prospect it painted in an in-depth study released last week on the city’s prime office market, which it conducts every 3 years. The survey revealed a sharp decline in occupancy of the city’s 253 Grade A office buildings, which collectively have a total floor space of 82.6 million square feet.

“This decline forms part of Hong Kong’s biggest and longest office market down cycle in history,” CBRE reported, noting that it did not see an increase in “company migration” or office closures in the 3 years to March 2022 – the month before Hong Kong tackled its worst Covid-19 outbreak – from the previous 3-year cycle.

The contraction has steadily gained momentum. The vacancy rate in this sector, having risen from below 4 per cent in 2019, had climbed to 11.3 per cent in July, according to industry consultant Colliers. This is the highest level since the 2008-2009 global financial crisis.

JLL reported a minor rise in vacancy to 9.6 per cent for the same month. Barnes of JLL said: “The office market is quiet in July and August, as the traditional low season of the market, with many senior executives taking the opportunity to travel overseas after the reopening of borders in most countries.” He believes that leasing activity will improve in the next few months.

According to the CBRE report, a record-high vacancy rate, representing 11.3 million square feet of floor space, came from downsizing by 948 companies, or 9.5 per cent of all Grade A office tenants. They cut their occupied space on average by 30-40 per cent, leading to a drop in rent of nearly 30 per cent in the 3 years to March, it said.

The largest cohort of downsizing firms is banks and financial firms – 218 of them – even amid a strong IPO market. They remain the largest single occupier group in Hong Kong’s Grade A office market.  

CBRE said that the “brightest growth prospects” will come from wealth management, healthcare and medical, tech and telecom, construction, co-working centres and retail.  

Even if reopening the economy restores Hong Kong’s appeal as an international financial hub, the city’s prime office market still needs to contend with a severe cyclical overhang. Analysts pointed to a deluge of Grade A office space, with a glut of 15 million square feet of new supply to enter the market in the 5 years to 2026.  

“We believe this new supply will take years to digest. Tenants will have a wide variety of options by then, so retaining existing tenants and attracting new occupiers becomes a headache for landlords,” Colliers said.  

CBRE also arrived at the same conclusion. “Supply and demand will remain imbalanced, ensuring the market continues to favour tenants,” it noted.