Rent Concession & Reduction

OCT 2021 | LAST UPDATED

 

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SNAPSHOT

With current market conditions and the on-going COVID-19 pandemic, businesses are exploring solutions for both rent concessions or rental reductions/ relief. In the case of office tenants, there are a variety of issues that will influence negotiations and understanding the fundamentals from the landlord/ ownership perspective will shed light on the opportunities.

LANDLORD PERSPECTIVE

For major developers or investors, typically they will consider a medium to longer term view on tenant selection in line with their preference for tenant mix or quality of covenant. In a good market, enhancing the asset value by securing new rental levels mean that all other lettings immediately become reversionary. In down markets, where demand no longer outstrips supply, incentives and concessions (i.e. rent-free periods) are offered to maintain rental levels.

In contrast, the aim of most secondary investors is to secure an income, often to meet mortgage repayments. In some cases any letting to reduce rental void periods are preferable.

TENANT PERSPECTIVE

In either case, current market pressures and dwindling demand has presented opportunities for tenants with an existing lease or an upcoming lease event to re-negotiate terms and market concessions in the case of new lettings/ relocations.

HOW TO MAXIMISE CONCESSIONS?

An office lease package is rarely solely about rent or price. There are numerous factors that can bring a negotiation to a desirable outcome for both parties. By leveraging a correct negotiation strategy, with the use of data and in-market experts, tenants can secure out-sized concessions over standard market concessions.

ARE RENTAL REDUCTIONS COMMON?

Similar to concessions, rental reduction negotiations typically occur during the lease term during market abnormalities. Unless a lease mechanism is triggered, the landlord is rarely obligated to amend lease terms, but rather, negotiations are generally borne out of good faith with the tenant.

In all cases, timing is critical in assessing the correct approach for opening landlord discussions, whether this be a lease restructure proposal, temporary rental relief request or rental reduction.

THE SOLUTION?

The simple answer is to utilise data and technology coupled with representation with in-market and institutional expertise. Proprietary algorithms at SAVVI perform data alignment of millions of square feet of lease data and the best market deals, real-time. Submit your details to receive your rent concession or reduction estimate.


RENT CONCESSION | HONG KONG

Given the high occupancy cost of Hong Kong, the most common barriers businesses face in maximising rental concessions and rental reductions or relief, is in the inefficient process of finding the ideal office for rent coupled with expert lease negotiations to maximise value for both during and after the lease expiry date.

The below chart highlights the value that can be generated for tenants in real-time case studies where the correct strategy was implemented compared to the market for Grade A office tenants in Hong Kong.

HONG KONG MARKET CONCESSIONS (OCT 2021)*

*SUBJECT TO TENANT COVENANT & OVERALL LEASE PACKAGE

RENT REDUCTION | HONG KONG

Given evolving market conditions, successfully and optimising rental reductions will require detailed planning. This will include but not limited to active engagement of all stakeholders, forming a narrative supported by real-time case studies / data and in-market experts to handle communications.

The chart below highlights real-time data on rental reductions by % (up to 3 mths rent) for Grade A offices by district in Hong Kong.

HONG KONG OFFICE RENTAL REDUCTION (2021)*

*SUBJECT TO NEGOTIATIONS

ARE THERE OTHER IMMEDIATE SAVINGS FOR OUR BUSINESS?

Yes, data driven match making is just the start, on managing your office rental assignment, there are also a number of immediate solutions to reduce your capital expenditure (CAPEX) significantly to justify setting up a new office or when considering a renewal vs office relocation. Let’s recap just a couple of these below.

1. MASSIVE SAVINGS ON OFFICE FIT-OUT WITH SAVVI

Through SAVVI's Tenant's Network, finding your ideal office will start by accessing thousands of off-market and upcoming opportunities so that you may save hundreds of thousands or millions on fit-out cost alone.

CAPEX on fit-out is often the top cost factor faced by companies when considering a renewal vs relocation assignment in Hong Kong. By removing this cost factor, companies are in a far better position to align their true business operation needs, whether this be expansion, downsize or simply upgrading or reducing overall real estate expenditure.

For companies in cost avoidance mode, often, the time and cost considerations of fitting-out a new office (in order to capitalise on an improved rental opportunity) can alone spoil an office relocation opportunity, especially where any rental cost savings are off-set by moving costs.

The holy grail is to be able to capture undervalued rental opportunities that are also off-market (avoiding bidding wars), upcoming (not open market), and fitted opportunities (massive cost savings) that match your projected business needs over the next 3 years in Hong Kong.

Fit-out costs are typically quoted and assessed on the net square footage of the space and for Class A or Prime buildings normally range from HKD 600–1200 per square foot, including construction, furniture, wiring, design fees, etc.

To learn more about mitigating fit-out cost, see our guide here.

2. MASSIVE SAVINGS ON OFFICE REINSTATEMENT WITH SAVVI

Another reason companies tend to renew their lease, sometimes reluctantly, is the overall costs involved with relocation. Aside from fit-out costs above, the lease agreement in Hong Kong generally requires tenants to restore the property to its original handover condition, before the expiration of the tenancy at their own cost. Reinstatement costs for Class A or Prime buildings normally range from HKD 150–300 per square foot net.

Through listing your company's office space early with SAVVI, you have access to thousands of prospective tenant's who may take over your office space in 'as is' condition, saving them both design & fit out costs, and releasing you from your reinstatement liabilities.

For a 5,000 square foot net office, this translates to an average of HKD 1,000,000 in potential and immediate reinstatement savings.

Learn more about achieving zero reinstatement cost here.


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