The protracted Sino-US trade dispute and five months of social unrest have taken a toll on Hong Kong, especially the prime office space market, with more companies moving out of the city centre to suburbs in search of cheaper office space.

Hong Kong-based Dah Sing Bank is the latest to join the exodus in the third quarter of this year. It will take up a 7,060sqm space at the Sunlight Tower on Queen’s Road East in Wan Chai for a rent of HK$3.42 million (US$440,000) per month.

The reported deal will see the 72-year-old bank, which has 70 branches in Hong Kong, Macao and Chinese mainland, paying roughly 50 per cent less than the current rent at its years-long location at the Everbright Centre, 108 Gloucester Road in Wan Chai, a business hub.

Grade A office rents in Wan Chai and Causeway Bay, home to the city’s third tallest tower – the 78-storey Central Plaza – saw a 1.6 per cent drop in the third quarter compared with the same period last year, marking the first rental decline since 2014, data from real estate service provider Savills shows.

Office rents in Central district, the world’s most expensive, saw a 3.2 per cent drop in the past three months ending September as against the same period last year, the largest quarterly fall since 2012.

The downward pressure has pushed the vacancy rate up to 7.4 per cent in this area, the highest in 14 years, real estate consultancy Cushman & Wakefield said.

“The escalating trade tensions between the world’s two largest economies and the long-drawn protests in the city have led to so-called ‘decentralisation’, where companies are relocating their offices from the ‘trophy buildings’ in core areas to other places, in their quest to lower costs,” said John Siu, Cushman & Wakefield’s managing director for Hong Kong.

In the third quarter, the new lettings, mainly focused on noncore areas, mostly came from transactions already negotiated before July.

With the trade row and social unrest showing no signs of abating, research houses see no light at the end of the tunnel for the owners of city’s commercial office space. Cushman& Wakefield, in its latest report, has projected an eight per cent plunge in office rents in the Central district next year.

A dimmer view

Morgan Stanley, a US-based investment bank, took a dimmer view, anticipating the average office rents in Hong Kong to plunge up to 10 per cent over the next 12 months.

Besides the Dah Sing Bank, WPP, the world’s largest advertising conglomerate, consolidated its local offices once located in different buildings, by moving to K11 Atelier King’s Road in Island East district.

Office space owners are looking to attract companies with higher rental discounts. The owner of an upper floor office unit at the Bank of America Tower in Admiralty, Central, was reported to be quoting HK$58 per square foot (US$79.71 per square metre) – more than 30 per cent less than the market average.

As the market sentiment turns sour, several occupants have adopted the wait-and-watch approach visa-vis their expansion or relocation plans, said Keith Hemshall, Hong Kong-based executive director and head of office services at Cushman& Wakefield.

In recent years, the mainland companies are believed to be driving the demand for office space in Hong Kong. “But suddenly, prospects for this tenant group has dimmed,” said Simon Smith, senior director of research and consultancy at Savills, Asia-Pacific.

“On a positive note, the mainland enterprises remain committed to Hong Kong, even if some multinationals may be weighing other regional alternatives,” Smith reckoned.

However, the disruption of airport services and growing safety concerns have dimmed the level of corporate activity. As senior staff members are reluctant to visit Hong Kong, this can affect the decision-making process and the ability of firms to make lease commitments.

“With the leases slated to expire next year, most tenants want to wait and watch before entering into negotiations,” Smith said.

Multinationals voice similar continuity concerns, if not more, than their mainland counterparts. Smith said some companies are considering moving to other cities, with Singapore being the “clear favourite”.

However, disadvantages such as longer flight time to the mainland, high operational costs, and lack of suitable office space in Singapore make it difficult to bid farewell to Hong Kong, he said.

“For the time being, the overall office rents in Hong Kong remain relatively firm as fundamentals remain generally sound. If the current conditions persist next year, however, rents will see much heavier declines,” Smith warned.

CHINA DAILY/ASIA NEWS NETWORK