Scarce supply will continue to drive up office rents in the city, providing higher yields compared with other property sector investment opportunities, says industry
Entrepreneur Linda Ko, a specialist in the beauty industry in nearby Hong Kong, recently searched for a small office studio in the city for a beauty clinic. To her surprise, this property hunt has not been easy.
“Compared to Hong Kong, the rents for a quality studio office unit in Macau are not cheap,” she says. “For instance, a small unit in an industrial building is already HK$5,000 [US$640] a month with dilapidated décor.”
Her predicament is not unique in the territory, where landlords have overwhelming bargaining power in the office property market, say industry insiders. They believe the imbalance of supply and demand will continue to drive up office rents here for a sector that will be increasingly sought after by investors vis-a-vis other setors.
Property agency Savills (Macau) Ltd. recently published a research report on the city’s office market; namely, on two prime office areas — downtown/Nam Van and Nape areas. The report reveals that the average office transaction price here has enjoyed a nearly 16-fold increase in the 2002-2018 period, while average office rents rose between 30 and 50 per cent in the past five years, or an average of up to 10 per cent a year.
The current rental level for Grade A office averages MOP30-35 (US$3.75-4.4) a square foot, while rents for other grades hit MOP25 a square foot, the property agency noted.
“The new supply in the Macau office market is very scarce: only three new major office towers have been inaugurated in the past 12 years; namely, Fortuna Business Centre (FBC), Finance & IT (FIT) Centre, and Macau Daily News Building, which is not open to the public for rent,” said Franco Liu, Managing Director of Savills Macau.
Rising demand
The report also indicates the number of vacant office units in downtown/Nam Van and Nape areas stood at 565 across 34 major office buildings, or 528,000 square feet, translating into a vacancy rate of 8.1 per cent in these two key areas. Mr. Liu, however, pointed out nearly 70 per cent of the vacant units are standalone office studios with a relatively small gross area, not ideal for many firms.
Although supply is limited, demand has grown.
“Government figures show the number of newly incorporated firms here has kept rising in the past few years . . . which means the growth in demand has outstripped the rise in supply,” he said.
According to official data, some 5,953 new companies were incorporated in the city in 2018, up nearly 15 per cent from the previous year, with over 76.6 per cent of the new firms posting registered capital value of less than MOP50,000. The total number of registered firms reached 66,186 by end-2018, up 7.8 per cent year-on-year, said the data.
“New supply in the Macau office market is very scarce”
– Franco Liu, MD, Savills Macau.
MOP25 per sq. ft.
Average rental of office in Macau
Market sentiment
Meanwhile, the number of office transactions in the first five months of this year totalled 95, down 47.5 per cent from the same period in 2018, government figures show. The average office transaction reached MOP102,390 a square metre in the second quarter of this year, down 12.1 per cent from a year earlier and up 0.4 per cent from the preceding quarter.
Jacky Shek Po Tak, Senior Director of Centaline Macau and Hengqin Property Agency Ltd., points out that the lower transaction price for offices so far this year is because sales include large-sized units — which often translate into lower average prices than smaller office spaces — and market sentiment.
“Shrinking sales also do not reflect actual demand in the market . . . given scarce office supply,” Mr. Shek remarked. “With signs of de-escalation of the trade war between China and the United States, as well as a stable interest rate policy from the U.S. Federal Reserve, market sentiment has improved and could drive up the sales of . . . office property in the second half of this year.”
Higher yields
Although not as sanguine as Centaline, another property agency, Jones Lang LaSalle Macau (JLL Macau), has also tipped the office property to be increasingly favoured by investors because of higher investment yields.
“With extremely limited new office supply, the performance of office rental and yields stands out from other property sectors,” says Oliver Tong, Head of Leasing at JLL Macau, adding that only about 5,571 square metres of new office supply has entered the market in the past five years.
“As price levels of office properties have lowered when compared with the highs of the past it might potentially become investors’ preferred investment option once again,” Mr. Tong remarked.
Investment yields for the overall office market and Grade A office sector have remained stable at 2.8 per cent and 3.1 per cent, respectively, so far this year, compared with yields of 1.6-1.7 per cent in the residential property and 1.8 per cent in the retail property, he said. Rents for overall office and Grade A office space also inked up 5.1 per cent and 4.3 per cent, respectively, in the first half of 2019, he added.
Hengqin of little impact
The ongoing development of residential, commercial and office space in nearby Hengqin is expected to have little impact upon the local market. According to Mr. Liu, office space in Hengqin in the approved projects currently total over 15 million square feet, double the size of the office area in Central, Hong Kong, with more projects in the pipeline. Office rents in new projects on the nearby island could fetch between RMB100-130 a square metre (MOP10.89-MOP14.2 a square foot), he added – about half the current level of MOP25 a square foot in the Macau office sector.
“But I don’t think this will have any significant impact upon the Macau office market in the next five to 10 years,” he added. “The facilities and other complementary offerings in Hengqin have yet to mature, causing inconvenience for people to work and live there.”
“With extremely limited new office supply, the performance of office rental and yields stood out from other property sectors,” says Oliver Tong, Head of Leasing at JLL Macau. “As price levels of office properties have lowered when compared to the highs of the past it might potentially become investors’ preferred investment option once again”
Rather than office rents, manpower shortage and tight labour policies might be bigger incentives for some large corporations to rethink the Hengqin option, although “large companies might consider relocating their back office operation to Hengqin by hiring Mainland Chinese to staff the operation,” he added.
The MD remains bullish about the local office sector, anticipating rents will rise at least 5 per cent a year in the near future.
“Using our company as an example, we have not relocated since setting foot in Macau about 15 years ago . . . given the limited choice [of office space] in the market,” he revealed in his office, which is located in Landmark Plaza in the Nape area.
“There was a 25 per cent hike in rent in our last lease . . . showing that the bargaining power lies in the hands of landlords, not tenants,” Liu added.
Government major tenant in prime office areas
Government departments are the major tenants in two prime office areas in the city, accounting for nearly 20 per cent of total private units available for lease, a local study finds.
Real estate agency Savills (Macau) Ltd. recently published a research report on the city’s office market in downtown/Nam Van and Nape areas, surveying a total of 6,600 office units, or a gross area of 6.5 million square feet, in 35 office towers available for lease.
The study found public bodies occupied about 1,223 units – or over 1.2 million square feet – in these two prime office areas, representing nearly 20 per cent of the total, followed by construction and engineering (8.5 per cent), financial and investment services (7.5 per cent), trading and retail (6.5 per cent) and banking (5.9 per cent).
A further breakdown of tenants’ portfolios in these two areas highlighted government departments, financial and investment companies, and banks were the major forces in the office market in downtown/Nam Van area, while construction and engineering, education, gaming, trading and retail were dominant in NAPE area.
Of all public bodies, government departments under the Secretariat for Economy and Finance accounted for most private office spaces in these two areas, occupying nearly 380,000 square feet, according to Savills Macau. The departments under the legislature and the judicial bodies and the Secretariat for Social Affairs and Culture occupied over 280,800 square feet and 228,250 square feet, respectively.
China Plaza, Walorly Building, Macau Square, Comercial Nam Tung Building and World Trade Centre Macau Building were the private office towers in these two prime areas that were most crowded with government departments, the Savills Macau report found.
With a high presence in the private office market, government departments have been heavily criticised for paying high rents and misusing the public coffers for years. According to the latest figures submitted to the Legislative Assembly the government’s expenditure for renting private properties in 2018 totalled some MOP960 million (US$120 million), rising 8.7 per cent from MOP883 million in 2017 and 18.5 per cent from MOP810 million in 2016.
“With such an enormous amount of expenditure on rents, the government has to actively make good use of its existing vacant properties to reduce the expenditure,” said legislator Ella Lei Cheng I. “It also has to review the renting needs of each government department to see whether it is appropriate and rational, as well as developing e-government service to shrink the needs of physical office areas.”
In light of the public criticisms, the Administration recently utilised land plots across the territory to develop government buildings. For instance, a multi-functional government tower was completed last year in Pac On, Taipa, which could provide 25,000 square metres of storage and office facilities and save the public coffers MOP21 million a year in rents.
An 11-storey government building is also currently being developed on land next to Waldo Hotel and Casino in Nape area, and is expected to be completed by 2021 at the soonest. In the distance future, there are also plans for building headquarters for several public bodies – namely, the courts, police, Customs and the Commission of Audit – in newly reclaimed plots B and E1, although most projects are still in the early planning stage.
Franco Liu, Managing Director of Savills Macau, expects the prospects of the relocation of some government departments from private office units will have little impact upon the sector in the near future.
“Many projects still take at least five to 10 years for completion,” he concluded.
Property transactions in Hengqin drop over a quarter in 1H
The number of property transactions on nearby Hengqin Island declined by nearly 26 per cent year-on-year to 2,163 across 29 projects in the first half of this year, according to Centaline Macau and Hengqin Property Agency Ltd.
Of these transactions, 846 belonged to the sales of residential property in the first six months, up 166 per cent from a year earlier, the agency said. About 65 per cent of homes sold in Hengqin in the January-June period were small units with a gross area of less than 60 square metres, given the abundant supply of these homes in new projects, Centaline added.
Macau buyers were the biggest buyers of Hengqin properties in the first half of 2019, accounting for over 27 per cent of the 2,163 transaction, followed by 14 per cent from Hong Kong, the agency noted.
Investment yields
| Property Category | Grade A Office | Overall Office | Retail | High-end Residential | Mass Residential |
| Yield | 3.1% | 2.8% | 1.8% | 1.6% | 1.7% |
Source: JLL Macau
Macau Property Market Performance in 1H19
| Property Category | Grade A Office | Overall Office | Retail | High-end Residential | Mass Residential |
| Rental (y-o-y change) | +4.3% | +5.1% | 0% | +7% | +3.8% |
| Capital Value(y-o-y change) | 0% | 0% | -2.9% | -3.5% | -1.8% |
Source: JLL Macau
