Exodus of US firms from Hong Kong to avoid sanctions imposed in wake of security law would hit office market already hurt by unrest, coronavirus

A potential exodus of American companies from Hong Kong to avoid sanctions from US legislation that seeks to punish those who undermine the city’s freedom is likely to put pressure on landlords to reduce rents of prime office space, analysts said.

The fallout could be as much as a 30 per cent cut in rents, given that American companies are now the single largest occupier of prime office space in the city, according to one estimate. If the scenario plays out, it will further damage an office market that has been battered by a year of social unrest, and the coronavirus pandemic.

The vacancy rate of prime office space in the main business hub of Central hit 5 per cent in May, a 12-year high, while rents fell 2.7 per cent, according to property consultancy JLL.

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“It will certainly put pressure on rents for landlords,” said Maggie Hu, an assistant professor of real estate and finance at the Chinese University of Hong Kong. “A reduction in the range of 15 per cent to 30 per cent would be expected.”

Her forecast is based on a worst-case scenario of most American companies exiting the city.

As of June, US firms were the single largest occupiers of prime office space in Hong Kong, accounting for 12.5 million square feet, or 16 per cent, of the city’s total, according to CBRE. That is equivalent to more than four International Commerce Centres ” the tallest building in Hong Kong.

Mainland Chinese companies occupy 12 per cent of the total prime office space in the city.

Central and Kowloon East may see the biggest impact as they account for 40 per cent of American firms based in the city. American companies are mostly engaged in banking and finance.

US legislators have approved a law that would punish foreign individuals and banks for “materially contributing” to any failure by the Chinese government to live up to its obligations under a Sino”British agreement signed in 1984 that guarantees a high degree of autonomy to the city at least until 2047. The legislation, which has yet to be signed by President Donald Trump, was introduced as a response to Beijing’s national security law that was tailor-made for Hong Kong.

Other factors that may encourage American companies to leave are “trade disputes and geopolitical tensions between the US and China, the devastating impact from Covid-19 on their business outlook and profits, and the impact of e-commerce on more conventional business models,” said Hu.

The repercussions could be two-fold, said Nai Jia Lee, deputy director of the Institute of Real Estate & Urban Studies at the National University of Singapore.

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“I think if US firms leave the city, it will put pressure on rents,” he said. “It will also affect firms that rely on the US firms for services or businesses.”

Hu believes the overall likelihood of lots of US companies leaving Hong Kong is slim given the city’s strategic location and its status as a financial hub.

“A large portion of them will be expected to stay,” Hu said.

If US firms do leave, it will most likely be because of cost reduction rather than geopolitical considerations, said Thomas Lam, executive director at Knight Frank.

“Unless there are fundamental and structural changes to the Hong Kong economy, most of the companies will continue to stay,” he said. “Some manufacturing companies may consider relocating to Southeast Asian countries but that is to lower their costs and potential risks.”

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.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.

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