A ROUGH START

The fifth wave of COVID infections in Hong Kong almost brought the city to a standstill in the first quarter, with the most stringent social distancing restrictions put in place since the beginning of the pandemic in 2020. Banning dine-in after 6 pm and encouraging work-from-home on top of some of the world’s toughest travel restrictions had grievous consequences for the recovering economy. Q1/2022 GDP contracted by -4.0% YoY, with a spike in the unemployment rate to 5.0% in March 2022. Even with the gradual relaxation of social distancing in the second quarter, a further decline of -0.3% in GDP is still expected, and a full-blown recovery for the rest of the year remains unlikely.
As the rest of the world opened up, expats left the city in large numbers, no longer able to tolerate the disruption to their private and professional lives. Meanwhile, the Russia-Ukraine war which erupted in February alongside the lockdown of major cities in China promoted further external uncertainties and harmed business sentiment, which was refl ected in stock market turbulence over the period.

SUPPLY PRESSURE

It should not come as a surprise that the Grade  A office market in Hong Kong was noticeably quiet in the fi rst quarter regarding transaction volumes when WFH was largely in place until late April. In fact, rents have been declining for 11 consecutive quarters, amounting to an overall drop of -27% to Q1/2022. A -1.5% decline QoQ in prices was also recorded in Q1, and further falls are expected. The estimated supply pipeline of Grade A offi ces from 2022 to 2025 shows that a total of 11 million sq ft net of Grade A office space will come to the market while annual take-up over the period will only average around 1.0 million sq ft net under normal circumstances. Minimal pre-commitment is generally observed in Grade A projects due to complete in the latter half of 2022 and the current economic situation suggests that this figure is unlikely to rise in the near future. Immense supply pressure will undoubtedly reinforce the downward trend in rents and capital values until 2024, and it is expected that the vacancy rate will climb to close to 20%.