New completions drive positive net absorption

• In Q2 2024, the market conditions remained tenant-friendly, with occupiers upgrading to higher-quality spaces. Mainly due to the realisation of pre-committed space in new completions, 220,100 sq ft of net absorption was recorded.
• In the leasing market, the insurance sector continued its expansion momentum. As a notable case, AIA International leased one floor with 149,300 sq ft (GFA) at AIRSIDE in Kai Tak to meet growing business demand.

Three Grade A office projects complete in Q2 2024

• Cheung Kong Center II in the Central submarket, AIA Building in Wanchai and KTR350 in Kwun Tong added 797,000 sq ft (NFA) of space to the market.
• Partly driven by new completions, the overall vacancy rate continued to rise to 13.6%. Central’s vacancy rose to 12.1%, and Hong Kong East and Kowloon East rose to 13.4% and 18.3%, respectively. Wanchai/Causeway Bay’s vacancy dropped to 10.0%.

Rents decline across all submarkets

• Rents in the overall market declined by 1.7% q-o-q in Q2 2024. Notably, rents in Central dropped 2.3%, while rents in Wanchai/Causeway Bay and Hong Kong East dropped by 1.1% and 2.0%, respectively. Kowloon East’s rent dropped by 1.9%.
• Amidst elevated financial costs and a weak rent outlook, capital values in the overall market dropped by 3.1% q-o-q in Q2 2024, while investment yields expanded marginally.

Outlook: Search for quality in a tenant market

• Despite limited demand for expansions, consolidation and flight-to-quality remain the central narratives. In a tenant-favourable market, buildings with premium specifications and strong ESG credentials are experiencing heightened demand.
• The office market has experienced an influx of new supply in recent years, while take-up has been slower than anticipated. As a result, overall vacancy rates are expected to remain at high levels. We anticipate that rents will drop 5%–10% in 2024.