Trade War's implication on office

Last Update : 2018-11-20



 China-US Trade War’s implication on Grade A office price

The rental performance of commercial buildings is still positive under the unstable economic environment worldwide. The monthly rent of fragmented ownership grade A offices has increased by 0.3% and the cumulative growth since 2018 is 10.1% which once again created a new record high.  With the impacts of the trade war between China and the United States, certainly there will be a decrease in office demand but there won’t be significant implication to the market.  In addition, the office supply in the near future is still limited, the rental price will keep going up steadily next year.

 

Although the trade war between China and the United States has started impacting the global economy, surprisingly the rental prices of both grade A and grade B offices went up by 0.3% and 0.1% respectively. The year-to-date (YTD) growth was 10.1% and 4% respectively. However, the yielding rate of office buildings in the central business district (CBD) is still low, for instance, the yielding rate of Central grade A office is about 2.3%, Sheung Wan and Admiralty are about 2.5%.

 

The rental price forecast is usually affected by various factors such as demand and supply (vacancy rate) and the economic environment (unemployment rate).  The reason for the continuous growth of rental price was due to the low office building supply and low vacancy rate in CBD.

 

The relationship between office rent and the unemployment rate 

Furthermore, in fact, the office rental price and unemployment rate are closely related.  According to the government statistics, in the last 25 years, whenever the unemployment rate increases by 2%, the office rent drops 20%.  On the other hand, when the unemployment rate drops, there is an increase in office rent. For example, since the financial crisis in 1997, the unemployment rate rose from 2.1% to 8.5% in 2003.  The rental price during that period dropped by 55%.  Moreover, since the economic environment has improved in the past few years with a drastic decrease in unemployment rate from 5.5% to 2.8%.  Therefore, there is a 90% increase in office rental price.  These evidence strongly indicate that the unemployment rate is a key factor affecting the office rental price.

 

Since the beginning of the trade war in the middle of 2018, some of the trading companies and manufacturing companies have been impacted gradually.  It is apparent that certain China-based enterprises also slowed down their expansion pace.  However, estimation shows that the overall implication of the trade war will be reflected in the market only in the first half of 2019.

 

2019 Forecast 

It is also believed that the whole business industry will have sufficient time to tackle and prepare for the implications brought by the trade war.  The global economy may not enter down turn swiftly and the unemployment rate will not surge in a short period of time. Although the office building supply in the coming 3 years will slowly increase, it is still unable to satisfy the severe shortage over the last 10 years which means the demand still exceeds supply.  Under such condition, the office rent in Hong Kong next year will remain in an increasing trend.