Chinese firms seeking Hong Kong listings amid US hostility may help buoy flagging office rental market as space the size of Lippo Centre abandoned

By Lam Ka-sing kasing.lam@scmp.com / https://www.scmp.com/business/article/3093333/mainland-chinese-firms-seeking-hong-kong-listings-amid-us-hostility-may?utm_medium=partner&utm_campaign=contentexchange&utm_source=EdgeProp&utm_content=3093333 | July 16, 2020 1:38 PM SGT
Companies are giving up their office space in Hong Kong at an almost unprecedented rate as the economy tanks in the wake of Covid-19, which piled further misery on top of the city's year-long political crisis.
But observers say there is a glimmer of hope for the world's most expensive office market: mainland Chinese firms setting up shop as they embark on secondary stock listings in Hong Kong amid rising tension between Beijing and Washington.
With the Trump administration pushing legislation that could lead to delistings of US-traded Chinese companies, some firms are gearing up for secondary stock offerings in the city to fend off the threat. Gaming company NetEase and JD.com, China's second-largest e-commerce platform, have recently spearheaded the expected stampede by debuting in Hong Kong.
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"Secondary listings of mainland firms on the Hong Kong stock exchange are expected to lead a pickup in leasing demand in the city," said Alex Barnes, head of markets at JLL. "Although it may not immediately result in these companies taking on large office spaces, the downstream business opportunities for ancillary finance and business services will support overall growth."
Some mainland Chinese tech heavyweights, including the Post's owner Alibaba and ByteDance, have recently committed to new leases of large swathes of premium office space in Hong Kong.
It may not be enough to counterbalance surging vacancy rates.
The amount of surrendered space " offices vacated by occupants before their lease expires " in Hong Kong is at an 18-year high as multinationals elect to downsize their footprint in the city.
In the first half of this year, tenants bailed on 1.3 million sq ft of office space " the size of Admiralty's Lippo Centre or Kowloon East's Landmark East " as they tried to cut costs to stay afloat. About three quarters of the abandoned space is on Hong Kong Island.
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"Leasing demand will remain subdued in the second half of this year due to the weakened economy," said Barnes in an online "midyear property review" briefing.
JLL predicts Central office rent will fall by up to 30 per cent this year as the amount of vacant office space continues to rise.
The premium, or grade A, office market recorded a negative take-up of 1.42 million sq ft in the first six months, among the highest net withdrawals from the market ever recorded, according to JLL.
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Rents in Central have dropped almost a quarter from their peak in April 2019 as companies relocate to cheaper districts.
"Corporate solvency has become an issue as more firms opt to downsize or close altogether in a business environment facing numerous challenges over the next six months," said Simon Smith, senior director of research and consultancy at Savills.
The total amount of office transactions plummeted by 83 per cent in the first half, according to Stanley Chui, sales director at Ricacorp (CIR) Properties.
"The global epidemic situation was severe, and many countries in Europe and the United States closed their borders to prevent the spread. The economy and pace of corporate expansion was greatly affected," said Chui.
During the pandemic, many companies have asked their employees to work from home. Having realised some of its benefits, some have taken the opportunity to control costs, downsizing their offices by 5 to 20 per cent, said Fiona Ngan, head of office services, Hong Kong, at Colliers International.
That trend alone may push the vacancy rate of the office market higher than its current 8.1 per cent, she said.
Some smaller businesses, and those in purchasing and shipping, have had problems paying their rent, said Ngan, pushing landlords to take legal action. Some have just walked away from their leases and abandoned the office space, she added, though that has not happened as much as it did during the Sars outbreak in 2003.
Guangzhou-based developer KWG Group Holdings recently rented 25,609 sq ft at The Center, Hong Kong's priciest commercial tower, according to Savills.
Some major mainland financial institutions, such as CMB International Capital, China Minsheng Bank and Orient Finance Holdings, were also said to have signed up for additional office space in Central while their foreign counterparts consider downsizing, the consultancy added.
"Although the unemployment rate in finance, insurance, real estate and business services hit a 10-year peak, we see a resurgence in demand from [mainland] technology and finance companies and flexible space operators, which supports the office leasing market," said Ricky Lau, deputy managing director and head of office leasing at Savills.
Despite the entry of mainland firms, the outlook for Hong Kong's office market remains cloudy, as withdrawals outpace new lettings.
"While we are seeing inspection activities gradually picking up, occupiers remain very cautious," said Alan Lok, executive director of advisory and transaction services for offices at CBRE Hong Kong. "A majority of current leasing mandates are for cost-control or cost-saving purposes, whilst new and expansion needs remain very limited."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
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