Some landlords are getting desperate in attracting tenants to their offices in Hong Kong, as more than four months of civic unrest have deterred many companies – especially mainland Chinese tenants more willing to pay top dollar for marquee addresses – from expanding their businesses in the world’s costliest commercial property market.

Extra sweeteners are the order of the day, real estate agents said, especially for buildings that lack the cachet of famous anchor tenants, as landlords throw in incentives to persuade reluctant tenants to commit. Some owners are willing to charge a token HK$1, and up to HK$100 per month, for the first three months of occupation, adding the sweetener to the usual rent-free period that applies for corporate tenants, said Colliers International’s head of office services Fiona Ngan.

“Some second-tier offices and buildings with multiple owners in Central are now thinking of offering license periods of between one and up to three months, for anything between HK$1 and HK$100 to lure tenants amid the dire market condition,” she said.

The desperation underscores how Hong Kong’s worst political crisis in decades has disrupted the decade-long bull run in the city’s property market, causing the prices of new apartments, lived-in homes, retail space and commercial offices to fall across the city. Protest rallies that began in early June have since deteriorated into regular street clashes, with the police firing tear gas and deploying water canons to disperse the radical protesters who are resorting to vandalism and arson.

Hong Kong’s services industry – the mainstay of the city’s economy – is bearing the brunt of the aftermath of the civic unrest. Months of televised mayhem have deterred visitors, forced conferences and shows to be cancelled, and crimped retail sales and consumption, pushing the local economy toward a technical recession in the fiscal third quarter ending in December.

Median rental charge in the city, which topped the world in 2019 for the fourth successive year, is expected to drop 10 per cent next year, according to Morgan Stanley, which doubled its estimate on Monday, citing Hong Kong’s weaker economic growth and lower fundraising activities.

Average office vacancy rates jumped to a 14-year high of 7.4 per cent in September, while one in 10 retail shops stand vacant in Causeway Bay, the city’s high street and the world’s most expensive shopping strip, forcing commercial landlords to slash their rent by up to 60 per cent.

Hong Kong’s offices, especially those located in a handful of landmark buildings in Central, were the most sought after addresses for businesses that wanted to convey prestige and credibility in Asia. Demand by deep-pocketed mainland Chinese financial firms, cryptocurrency exchanges and wealth managers have driven Central rents to records, often outbidding the law firms, accountants and auditors who used to make up the majority of tenants in the district.

“Chinese companies are all renting smaller offices now, based on deals that we recently settled, usually ranging from 1,000 to 2,000 square feet,” said Ngan. “It is unlikely for anyone to find tenants to take up large space now.”

In the first three quarters this year, just 14 per cent of the office space in Central was leased to mainland Chinese tenants, compared with 58 per cent in 2018 and 57 per cent in 2017, agents said.

That is no longer the case, as mainland Chinese companies found themselves and their employees the targets of Hong Kong protesters’ ire. Bank of China (Hong Kong), the local unit of China’s oldest bank and one of the city’s three currency issuers, had to shut all 200 branches after a particularly violent weekend when radical protesters vandalised branches and smashed ATMs.

“The recent violent social unrest is the main reason for the bad sentiment in the office market,” said James Mak, Midland Commercial’s district sales director. “Nobody has a clue when and how the city’s ongoing disputes would end and companies, seeing the uncertainties, are now putting off any commitments to relocations or expansions.”

Central’s average rent fell 1.3 per cent in the three months ended in September, according to Savills’ data, the first quarterly decline since 2014.

Two offices on the 32nd floor of The Bank of America Tower – a 38-storey grade A commercial block in Central, recently failed to close a lease even after the landlord slashed the rent by more than 40 per cent to HK$58 per square foot per month since the space became empty in April, according to people familiar with the terms.

Hong Kong’s office tenants usually enjoy between one and three months when they don’t have to pay rent. Now with the so-called license period of up to three months, tenants get to save up to half a year in leasing charges.

“The good thing about a license agreement is that it will not be disclosed on the tenancy agreement, so the signed lease will not appear that low,” avoiding the danger of dragging the market price lower, said Ngan.

Still, transactions in commercial leases have trickled to a drop in the past few months, pointing to the dismal outlook for the sector. Most of the commercial leases that are due for expiry in the second quarter ending in June 2020, which are typically renewed six months ahead of time in September, have not been renewed, forcing landlords to slash rent to avoid the spectre of facing an unoccupied property, agents said.

The Center, sold en bloc last year in the world’s most expensive commercial sale, was asking for between HK$85 and up to HK$135 per sq ft in monthly rent in June, before the first 1 million protesters took to Hong Kong’s streets on June 9 to protest a controversial extradition bill. Even though the city’s Chief Executive Carrie Lam Cheng Yuet-ngor agreed to withdraw her unpopular bill, protests have persisted, and the new landlords in The Center are now offering space for an average of HK$90 per sq ft, agents said.

“Some units have hit as low as HK$65 per square foot a month,” said Mak.

Other incentives are also on offer. Some landlords at The Center, Admiralty Centre and the United Centre are letting tenants commence their leases after Lunar New Year celebrations in late January, still four months away.

“It’s lucky enough if they can just find someone who would sign those leases, considering the vacancy rate in the city,” said Mak.