HK office rent tops globally, but demand remains supportive

February 14, 2019 11:47
Commercial rents in Hong Kong are now the most expensive in the world. Photo: Bloomberg

Financial market performance has often been influenced by geopolitical events, such as the trade dispute between China and the United States last year. This brings additional volatility to an environment that is already grappling with several key changes, including the transition to greener energy, the rise of artificial intelligence and the internet of things, and ageing in most advanced economies in Asia and Europe.

Nonetheless, “volatility” itself is a neutral term, as it just means larger-than-normal movements that can be either upwards or downwards. When geopolitical pressure moderates, the stock market can indeed rebound quickly, as we have observed in January. The Hang Seng Index, for example, rallied 6.9 percent last month.

While economic slowdown is generally a negative news flow, the market took comfort as the Chinese government has indicated a new round of easing policies to spur economic growth.

In addition to slower economic growth in China and lingering geopolitical issues around the globe, the markets focused on expectations of a slower pace of US interest rate hikes. A recent speech by Federal Reserve chairman Jerome Powell has even encouraged the markets to speculate on a possible reversal of the central bank policy stance. If the Fed does slow down its interest rate increases as it is now indicating, commercial real estate including REITs should benefit.

Asia Pacific REITs have outperformed the region’s equity indices in January, with GPR/APREA Investable REIT Index reporting 7.6 percent gain for January, compared to MSCI Asia Pacific’s 6.8 percent. Australia and Singapore REITs have outperformed their equity markets while Japan REITs underperformed the nation's equity market.

As REITs are ultimately just a securitized form of real estate, the performance of Hong Kong REITs is naturally tied to the performance of the real estate market itself. We note that commercial rents in Hong Kong are now the most expensive in the world. For example, according to the latest data from Jones Lang LaSalle, office rents in Central are now HK$220 per square foot per month, which makes it the most expensive in the world and almost 60 percent more expensive than those in Midtown, New York, the number two on the list.

In addition, other business districts in Hong Kong are also highly ranked business nodes in their own right. With a rent of about HK$79 per month per square foot, for example, Island East ranks 12th globally, edging out Shinjuku in Tokyo. Even Kowloon East, Hong Kong’s newest business district, now ranks 33rd globally, outcompeting European cities such as Paris, Frankfurt, and Geneva.

Hong Kong’s grade A office stock has now reached over 70 million square feet, which is comparable to the 100 million square feet New York and London have. In other words, Hong Kong office stock is not as restricted as it was twenty years ago, when the city's total stock was only about 30 million square feet. The high rents we observe, therefore, are driven by demand.

Moreover, as grade A office space often serves multinational companies, the demand shows that Hong Kong’s business environment remains attractive globally. Even though the office rents in Hong Kong are highest in the world, we believe that the market can still perform as long as business sentiment stays robust.

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Chief Investment Officer, Admiral Investment Ltd.