Hong Kong office capital values to drop by up to 15% this year

Blame it on the weak outlook amid market uncertainties.

Overall Grade A office net absorption was -614,700 sq ft in 4Q20 as occupiers opted for downsizing in the midst of economic recession. Decentralisation remained an ongoing trend as tenants looked for cost-effective options to reduce their rental expenses.

According to JLL, new lettings in Central increased by 42.1% q-o-q but decreased by 10.0% y-o-y. Leasing activity within the submarket revolved around small spaces.

Limited supply expected over the short term

No Grade A office buildings were completed in 4Q20. Total supply amounted to 271,400 sq ft in 2020. WKCDA Tower in the West Kowloon Cultural District and Landmark South in Wong Chuk Hang are anticipated to be completed in 2021, adding an extra 251,500 sq ft to Grade A office stock.

The government cancelled the tender of the commercial site at Area 57 in Tung Chung (TCTL 45) as the premiums offered by the three bidders failed to meet the government’s reserve price. In December 2020, the government launched the open tender of New Central Harbourfront Site 3 (IL 9088) under a two-envelope approach. The tender will close on 18 June 2021.
Rents and capital values decline at slower rates

The rental market remained soft throughout the quarter, with net effective rents falling by 2.8% q-o-q. Wanchai/Causeway Bay experienced the biggest drop among major office submarkets, while decentralised districts remained relatively resilient.

Capital values contracted by 3.3% q-o-q, as evidenced by some strata-titled office units transacted at relatively low prices. Yields edged up moderately as investors held higher yield expectations given the rental decline and vacancy pressure.

Outlook: Market corrections linger into 2021

As office tenants are predominantly in cost-saving mode, the rental decline trajectory is expected to extend to 2021. Rents are forecast to drop by 5-10% across all major office submarkets except Tsimshatsui, where rents are predicted to fall by 10-15% due to its aged stock and lack of competitive edge against decentralised locations.

Capital values are forecast to further decline by 10-15% in 2021 due to the weak outlook amid market uncertainties. Yields would thus expand to meet investor expectations.

Note: Hong Kong Office refers to Hong Kong's overall Grade A office market.