At least 100 “ageing” office buildings in Hong Kong need to be refurbished to unlock their rental potential, as the Covid-19 pandemic changes market dynamics and tenant expectations, according to JLL.

More than half of the city’s grade A and B buildings are considered ageing as they were built more than 20 years ago, with rents 10 to 40 per cent lower than well-maintained and newer buildings, the property consultancy said.

And with less than a quarter of them upgraded in the last 10 years, they could lose rental value worth over HK$10 billion (US$1.3 billion) without enhancements, it added.

“Many existing buildings no longer yield the same value as before the pandemic,” said Andrew Macpherson, head of asset development at JLL Asia Pacific.

Hysan Development, the owner of Lee Garden Three in Causeway Bay, has benefited from higher rental yields after the redevelopment of the office tower.

“The situation will be made worse when new buildings that have been designed to meet post-pandemic value drivers of health, wellness and sustainability, human experience and technology enter the market over the next two to three years.”

Upgrades such as wellness facilities, improved air quality, natural light and access to outdoor space, proptech solutions to support de-densification and social distancing must be among the priority renovation works in office buildings, JLL said.

Landlords are looking to rectify the situation and improve rental yields, undertaking major refurbishments on many of their properties. The Hong Kong Club building in Central, which was completed in 1984, is undergoing a renovation including a facade replacement. The China Everbright Centre in Wan Chai, completed in 1991, is also undergoing enhancements.

Hysan Development has benefited from the 2017 redevelopment of Lee Garden Three in Causeway Bay. It now commands rents of between HK$50 and HK$60 per square foot, higher than the listed lease price of between HK$45 and HK$48 per square foot in the nearby Leighton Centre, which was completed in 1977.

A renovation of the Leighton Centre, such as changing its lifts and upgrading its lobby, is likely to enhance its rents by 10 to 15 per cent, according to Leo Cheung, executive director of surveying company Pruden Holdings. Landlords typically prefer refurbishment as it takes a considerably shorter time and costs less than a third compared to redevelopment, he said.

“Demolishing the whole building and replacing it with a smart office with high ceilings and raised floors will definitely achieve higher rents,” Cheung said. “But it will take about four to five years to complete, which means no rental income during redevelopment.”

The need for office buildings to enhance their value assumes added significance as offices in Hong Kong are witnessing record high vacancy rates as companies rethink their real estate requirements.

The city’s main business district of Central saw a vacancy rate of 7.6 per cent, equivalent to 1.2 million sq ft of empty space, in the first quarter, a 15-year high, according to Savills. Rents in the district fell 3.8 per cent in the comparable period.

CBRE, meanwhile, estimates that rents in Central have slipped by 27 per cent from their peak about two years ago.

The total stock of private offices in the city amounted to 12.4 million square metres (133.4 million sq ft) at the end of last year, according to government data, with 71.3 per cent of these buildings built from before 1970 to 1999. Office completions in 2020 were 69,000 sq m or about 743,000 sq ft, representing a fall of 74 per cent from 2019.