Hong Kong's office landlords are raising the security deposit that tenants must put down, adding to the tighter liquidity conditions already faced by many firms.

Hong Kong's commercial landlords are now scrutinising the credit-worthiness of each tenant, doubling or tripling the security deposit in some cases, as weaker business sentiment has led to several cases of tenants reneging on their leases. The industry norm in Hong Kong for landlords is to collect three months’ worth of rent as deposit.

Tenants of businesses related to cryptocurrencies, and mainland firms who are known to be debt-saddled, have been placed under scrutiny, according to several office owners and consultants in the city.

Lawsuits

In more extreme cases, landlords are now suing their former tenants. Mulberry Land, a wholly owned subsidiary of Hong Kong Land, sued HNA Group for HK$8.3 million in costs related to the surrender of its office space, according to a Thursday report on the «South China Morning Post». 

Mulberry Land claims that the debt-laden Chinese conglomerate owes it two instalments – one worth HK$3.65 million, which had been due on December 1, 2018 and another of HK$4.65 million due on January 1 this year, according to a writ. In its defence, HNA said in a statement that «the relevant money has been paid in full» and that the delay was due to a «liquidity problem», without elaborating. 

Last month, landlords Ever Light and Pridemax took HMV Marketing to the High Court after the music retailer allegedly failed to pay rents for its flagship store in Causeway Bay and concept store in Central, as reported by various news outlets.

Weaker Outlook But Not Necessarily Weaker Rents

Business uncertainties arising from the US-China Trade War has led to a slowdown in rental and capital value growth of Hong Kong's commercial properties in the second half of 2018. This year, the market will continue to be clouded by the trade war, said property consultants JLL's year-end Property Market Review and Forecast published last month. 

While capital values of Grade A office will drop up to 10 percent this year, rents are not necessarily lower due to low supply. «Demand for office space will continue to soften in 2019 due to the uncertainties in economy. (However), the extremely tight vacancy environment will support Grade A Office rents to grow 0-5 percent in 2019. Rents in High Street Shops to soften in the range of 0-5 percent in 2019 but Prime Shopping Centre rents should hold firm, up 0-5 percent,» the consultancy wrote.

Mainland companies accounted for just 30 percent of all new lettings in Central's office market in 2018, dropping significantly from the 48 percent in 2017.