With average occupancy costs exceeding New York’s Midtown by 59%, Hong Kong’s Central district is the world’s most expensive office market. Central’s lofty heights have been driven by the influx of PRC firms into Hong Kong’s CBD at a time when availability has been extremely tight. Moreover, these tenants have been willing to pay above market rental rates to secure their preferred offices.

Known historically as a financial hub, Central’s prestigious address and proximity to regulatory bodies makes it an attractive location for PRC firms looking to establish a presence in Hong Kong. Their willingness to pay above market rates has been a key driver behind the growth in rents. Looking at new lettings in Central in 2018 (Figure 1), we can see that the rent paid by PRC firms was, on average, about 10% higher than the prevailing rental level in each individual building. On the other hand, the rents paid by non-PRC firms were, on average, about 5% higher.

Figure 1: Rental Premium/Discount Against Building Average
Source: JLL

In addition to the strong demand to secure office space, the higher rents paid by PRC firms can also be attributed to their relatively smaller requirements when compared to their non-PRC counterparts. Typical requirements generally ranged between 2,500-3,000 sq ft for PRC firms compared to 4,000-4,500 sq ft for non-PRC firms. Whether a tenant takes office space on higher floors versus lower floors can also affect rents though our analysis suggests that this wasn’t a major factor in contributing to the differences.

The higher rents paid by PRC-firms also reflects the weaker covenant strength among this cohort; whereby landlords will demand a rental premium, and in many cases a larger deposit. This perception of higher risks is also why two of the leasing transactions with the largest rental premiums in Central in 2018 were actually from non-PRC firms. For example, BitMEX, the crypto-currency trading platform, paid a record rent for their new location in Central in 2018.

Though a slowing economy back home and simmering trade war with the US has led to a slowdown in leasing demand from PRC-firms, we believe that this will be temporary. The Greater Bay Area initiative and ambitions of China’s biggest companies to go global will ensure that PRC demand will eventually return and be a key driver of the Central office market’s future growth. When this happens, the underlying dynamics that we’ve seen in recent years is likely to be the same and as a result, we should see rents to further extend on their current record highs.

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