The state of commercial office buildings is often seen as a barometer reflecting the economic development of a region. In recent years, the vacancy rate of Grade A office buildings in Hong Kong has been soaring, with the leasing market experiencing a bleak downturn. Properties under Li Ka-shing’s Cheung Kong Group, including luxurious sea-view towers, have seen vacancy rates reaching as high as 90%. Meanwhile, in mainland China’s major cities, the vacancy rates of Grade A office buildings have also reached unprecedented levels. Cities like Shenzhen and Qianhai near Hong Kong are attracting Hong Kong businesses with super low rental prices to set up offices in their areas.
Located in the core business district of Central, The Henderson, named after Henderson Land Development Co., one of Hong Kong’s four major property groups, is a 36-storey tower designed by renowned architect Zaha Hadid. The cost of acquiring this piece of land alone reached up to 3 billion US dollars. Despite its high-end status, this office building hasn’t been fully occupied by international financial institutions, with a vacancy rate of 40%. To address this, they have resorted to dividing the space into smaller offices, deviating from their initial strategy of renting out entire floors.
What about Li Ka-shing’s Cheung Kong Group, their main competitor? According to reports, their prestigious property in Central, the jewel on the crown – Cheung Kong Center – had about a quarter of its space vacant in the past year. In addition, their newly built Glass Tower nearby, a 41-storey Grade A office tower with full sea views known as Cheung Kong Center II, has only rented out 10% of its space due to delayed negotiations with potential tenants, resulting in 90% vacant space.
The challenges faced by Li Ka-shing’s premium properties actually mirror the grim reality and pessimistic outlook of Hong Kong’s office market. Despite Li Ka-shing’s son and Cheung Kong Group chairman Victor Li expressing confidence in the future of Cheung Kong Center II at a recent shareholders’ meeting, he admitted that the current market demand for office space is low in the short term.
On the other hand, Hong Kong International Finance Centre (IFC) Phase I and II, a complex that combines top-notch office spaces, internationally renowned leisure shopping malls, and world-class Four Seasons Hotel and Four Seasons Residences, has been considered one of Hong Kong’s most resilient office properties. The vacancy rates for Phase I and Phase II are 5.5% and 3.3% respectively, not returning to the 100% occupancy rates seen in May last year.
Across Hong Kong, newly constructed commercial office buildings are struggling to attract tenants. According to data from CBRE Group, in the first quarter of this year, most new office buildings had occupancy rates below 50%. Additionally, between the second and fourth quarters of this year, an additional 709,000 square meters of new office spaces are set to be completed, equivalent to the size of nine football fields. CBRE Group reported an average vacancy rate of 16.7% in the first quarter, marking a historical high.
Fiona Ngan, Head of Tenant Services at Colliers Hong Kong, stated that the high-end office leasing market in Hong Kong has not yet hit rock bottom. She mentioned, “Due to the sluggish economy, many multinational corporations are downsizing … and due to budget constraints, the entry of mainland Chinese companies into Hong Kong is not as fast as previously expected.”
Meanwhile, mainland China is aggressively competing for business in Hong Kong, as some high-end office buildings there are also grappling with high vacancy rates. In China’s four major first-tier cities, including Beijing, Shanghai, Guangzhou, and Shenzhen, the vacancy rates in commercial buildings have been soaring this year. For instance, in Shenzhen, the vacancy rate for Grade A office buildings in the first quarter of this year surged to 30.6%, indicating that the situation has not yet peaked.
According to a recent report by Savills, due to the influx of new projects into the market, the average vacancy rate for Grade A office buildings in Shenzhen escalated to 30.6% in the first quarter, representing an increase of 1.7 percentage points quarterly and a sharp rise of 6.2 percentage points annually. By the end of the first quarter this year, the total stock of Grade A office buildings in the market rose to 11.28 million square meters, up by 11.6% year-on-year, forcing landlords to aggressively adopt rental incentives.
Recent market statistics revealed that the rental prices of Grade A office buildings in Shenzhen dropped by 8.4% last year, surpassing the 6.5% decline in Hong Kong during the same period. It is believed by industry insiders that office rental prices in Shenzhen have returned to levels seen a decade ago.
“Trading discounts for volume (discounting to move inventory) has become a consensus among property owners,” leading to price reductions in various areas to attract tenants, resulting in a general decline in average rents citywide to 173.1 RMB per square meter per month (23.88 USD).
The rental levels in Shenzhen have further declined this year, according to a report by Pacific Davis in the first quarter, indicating a 6.7% year-on-year drop in the average office rental index to 163.9 RMB per square meter per month (22.62 USD), lower than the average rent of normal industrial buildings in Hong Kong. When comparing the average rental prices between Shenzhen and Hong Kong for Grade A office spaces, the rental difference per square meter is estimated to be 2.5 times.
Cheng Qiucun, Regional Director of Zone D for commercial properties in Shenzhen, stated that office rental fees are a major cost for businesses, prompting some companies from Hong Kong to open offices in Shenzhen to cut costs and increase efficiency.
Cheng also highlighted that numerous companies in Shenzhen have even purchased office spaces for their own use, with some transactions yielding substantial rental returns, involving individual investments. Some buyers are from Hong Kong or Hong Kong-based enterprises.
Property transactions have become a major force in the real estate market in Shenzhen, as indicated by Savills’ “2023 Shenzhen Bulk Transaction Market Report,” which stated that last year, the total transaction amount for large real estate deals in Shenzhen was approximately 28.3 billion RMB (3.904 billion USD), with office properties accounting for about 60% of the transactions.