Office Rental Premium Between Singapore and Hong Kong Narrowed Markedly Over Last Five Years to 108% in 2020

Below
is a snapshot of the office rental performance of both markets between
2015-2020:

• The rental premium between Hong Kong and
  Singapore Grade A CBD office rents widened rapidly in 2015 to reach 135% from
  71% in 2014 as Hong Kong rents went on an uptrend due to tight supply
  conditions and strong demand from corporate occupiers especially from Chinese
  financial firms looking for prime multi-floor space in the CBD.
• On the other hand, Singapore office rents fell
  in 2015 as the office market was hit by a double whammy of weak global economic
  growth and a supply glut.
• The gap in rents continued to widen to reach a
  peak of 173% in 2017, at which point the Singapore market started to recover,
  driven by a recovering global economy and demand from co-working operators and
  tech companies.
• The gap then narrowed in 2018, as Singapore
  market rents rose by 15.3% y-o-y amidst tight vacancies and strong demand while
  Hong Kong rents rose by a lesser 4.9% y-o-y in USD terms.
• As business sentiment in Hong Kong weakened amidst
  the protests in the latter half of 2019, the rental gap continued to close over
  this time period and was further exacerbated by the pandemic which further
  drove rents down in both cities. As of end 2020, we saw a 108% difference
  between Singapore and Hong Kong.

Outlook

Singapore
Despite
the ongoing pandemic, the Singapore office market is showing signs of recovery
with rental growth turning positive in 2Q 2021. This is fueled by a flight to
quality with demand for quality office space driven by technology and
investment management companies as they leverage the lower rents to secure
spaces in trophy buildings. Also, Singapore’s GDP growth is expected to bounce
back in 2021 and business confidence remains firm given Singapore’s relatively
strong pandemic track record in the region. Furthermore, new office supply has
seen strong pre-commitment rates and the pandemic situation has led to delays
in building completions fueling a tight supply situation in the Grade A office
market. Nonetheless, the recovery in office rents is expected to be mild over
the next few years on the back of lower structural demand for office space due
to remote working.

However,
the expected increase in Singapore office rents reflects the city’s increasing
importance as a hub for stability in an uncertain operating environment and the
increased significance of the ASEAN market to corporate occupiers. With the
successful roll-out of its vaccination programme coupled with a progressive
economic recovery plan, the country has maintained its reputation as a safe and
stable investment destination and regional business hub.

Hong
Kong
Hong
Kong rents are still expected to downtrend till 2023, closing the rental gap
between cities. The city’s Grade A new office supply adds up to circa. 5
million sf from now to 2023 and when combined with the sizable stock already
available in the market will put pressure on the city’s rentals. Landlords in
the CBD are more willing to offer competitive incentives in order to retain
existing tenants, or to lure potential tenants relocating from other submarkets.

An
ongoing rental adjustment will continue to take place until a significant
portion of new stock is being absorbed by the market, which will take about 2
to 3 years. These market changes present office tenants with an excellent
opportunity to upgrade their office space and as the market stabilizes and
reinvigorates itself, Hong Kong will be well-positioned to capitalize on the
expected surge in activity when cross-border travel resumes.

From an
office occupier perspective, conversations around business and operational
strategies as they relate to location and space requirements will continue to
gain momentum amidst the evolving pandemic situation and changes in regulatory
framework and policies. It is more important now than ever before for corporate
occupiers to be aware of the variability in rental trajectories and proactively
strategise to capitalise on expected rental declines or minimise rental
increases. They should align their real estate strategy to corporate enterprise
goals, especially when considering alternative locations. They should also
calculate their space requirements accurately through workplace analysis and
apply thoughtful design and fit-out standards to help ensure maximum
productivity. These strategies will define how they optimise their office space
with minimal cost exposures over the course of their lease period, in whichever
city they choose to be.

“We believe the outlook for the Hong Kong office
market is positive as Hong Kong is in pole position as the regional finance hub
in Asia Pacific due to a number of favourable factors such as the ongoing
development of the Greater Bay Area, low tax rates, active IPO market and its
position as a global offshore RMB centre, providing unparalleled access to
Mainland markets,” concluded Keith
Hemshall, Executive Director & Head of Office Services, Hong Kong, Cushman
& Wakefield.

Hong
Kong vs Singapore Grade A Office Rents

Source:
Cushman & Wakefield

Note:
Rents quoted here refer to the total occupancy costs in USD psf pm, which is
net effective rents plus service charge, focusing on Greater Central for Hong
Kong and the CBD for Singapore.