High street shop rentals in Causeway Bay drop by half from the peak level in 2013

• Underpinned by the demand from Mainland Chinese financial companies, Prime Central led the pack in rental growth with a surge of 5.3% in Q1 2016
• High street shop rents continued to fall, in some cases about half from the passing rent. Nevertheless, the decline in rentals presents an opportunity for foreign brands to enter the Hong Kong market.

HONG KONG -- (BUSINESS WIRE) --

In a review of the Hong Kong office and retail property markets today, DTZ/Cushman & Wakefield, a global leader in commercial real estate services, pointed out that office rents in core business districts continued to rise in Q1 2016, with Prime Central and Greater Central leading the pack with a surge of 5.3% and 4.3% quarter-on-quarter to HK$128.88 and HK$115.64 per sq ft per month respectively.

The continuous surge in Greater Central's rentals was underpinned by the demand from Mainland Chinese financial companies, which accounted for 49% of the major new lease in terms of size in Greater Central. In fact, insurance and banking & finance companies remained the main drivers of new lease demand in Q1, accounting for 80% of the total size of all major new lease in the quarter.

The overall absorption at approximately 262,000 sq ft in Q1 was largely due to the purchase of One Harbour Gate (West Tower) in Hung Hom by China Life. Apart from this, most of the districts had negative absorption. Mr Andy Yuen, DTZ/Cushman & Wakefield’s Director of Office Agency in Hong Kong, noted, "The released stock in the core districts is evidence that the flight to premises with greater space and cost efficiency continued, as many companies relocated for consolidation purpose. This led to better absorption levels in non-core areas such as Hong Kong South and Kowloon West."

In the face of high rents, this quarter some traditional Central tenants began to decentralize. For example, legal firm Ince & Co. has committed to move from Citibank Plaza in Central to One Island East in Quarry Bay, and Mizuho Financial Group from Chater House, Two Pacific Place and The Gateway to K11 office in Tsim Sha Tsui.

Mr John Siu, DTZ/Cushman & Wakefield’s Managing Director, Hong Kong, commented, "Although rental growth is expected to slow in Q2 due to corporations' concern about the prospects of the global and China markets, the high rentals in Hong Kong is contributing to a growing gap between the city and some other key regional business centers. For example, between the CBD Grade A¹ office rentals in Singapore and Hong Kong, there is a gap that grew from 37.0% in Q1 2015 to 54.3% in Q1 2016, and the difference in prime rentals² was even bigger, from 29.9% in Q1 2015 to 57.3% in Q1 2016. This substantial gap is likely to affect MNCs' decision to office location and might hurt Hong Kong’s competitiveness in the long run."

For the retail market, falling visitor volume – total volume in January and February declined by 13.6% year-on-year, Mainland tourist volume by 18% – and falling sales for all sectors of goods in January and February, led by jewelry and watches (down 24.2%) and electrical goods (down 26.7%), continued to undermine the rental level. Rent on high street, as indicated by general index, fell by another 5-7% quarter-on-quarter in Q1, with rentals in Causeway Bay falling by 51% from the peak level in 2013.

In addition, concerns of economic slowdown and social instability are prompting some retailers to seek earlier termination of their leases, in an attempt to save on rental expenses. Should this become a broader trend, the general high street rent could see another drop of 10-15% from the current level in this year.

Mr Kevin Lam, DTZ/Cushman & Wakefield's Head of Business Space, Hong Kong, said, "Despite this, retailers are taking the opportunity of the falling rental level to re-enter the core retail areas. There are fashion, accessories, shoes, cosmetic companies taking up street frontage shops vacated by companies of luxury goods, as those trades are sustained by a broader base of demand."

"Foreign brands are also benefitting from the more affordable rents to enter the Hong Kong market. Recently more Japanese and Korean brands from fashion, cosmetics, lifestyles to the food & beverage sector are aiming at the Hong Kong retail scene."

Another positive development of the retail market is that rents for F&B venues maintained a gradual upward trend, rising by 0.3-1.0% quarter-on-quarter in Q1. Mr Lam commented, "Demand for F&B spaces remains keen, although for new F&B operators, they are more interested in upstairs venues of moderate size in the key retail areas instead of ground shops, as a way of better cost control."

The successful merger of Cushman & Wakefield and DTZ closed September 1, 2015. The firm now operates under the iconic Cushman & Wakefield brand and has a new visual identity and logo that position the firm for the future and reflect its trusted global legacy and wider history. The new Cushman & Wakefield is led by Chairman & Chief Executive Officer Brett White and Global President Tod Lickerman. The company is majority owned by an investor group led by TPG, PAG, and OTPP.

About DTZ/Cushman & Wakefield

Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop and live. The firm’s 43,000 employees in more than 60 countries provide deep local and global insights that create significant value for occupiers and investors around the world. In Greater China, the firm has a co-branded presence under the name of DTZ/Cushman & Wakefield and operates 20 offices in the region. Cushman & Wakefield is among the largest commercial real estate services firms with revenues of US$5 billion across core services of agency leasing, asset services, capital markets, facility services, global occupier services, investment & asset management, project management, tenant representation and valuation & advisory. To learn more, please visit www.dtzcushwake.com or follow us on WeChat (DTZ_China) and LinkedIn (https://www.linkedin.com/company/dtz-cushman-wakefield).

¹ A comparison in rental levels between Greater Central, Hong Kong and Raffles Places, Singapore

² A comparison in rental levels between Prime Central, Hong Kong and Marina Bay, Singapore

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