High rents in Central are encouraging firms to look at Hong Kong’s emerging office districts.
Hong Kong boasts the most expensive office market in the world. With prime office rents in Central soaring above US$20 (HK$160) per sq ft per month, this prestigious location is losing its shine even to multinational corporations (MNCs), which have recently shown a preference for a few emerging alternative business districts.
The surging rents are driven mainly by robust demand from Mainland companies. Hong Kong is the international finance centre closest to home.
Adding to that, a number of initiatives have been introduced to promote cross-border trade and money flow between the Mainland and Hong Kong, including Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and the Mutual Fund Recognition arrangement, all of which have boosted office demand from Mainland firms.
“…the government announced plans to develop Kowloon East as an alternative business district as far back as 2011, with the aim of providing affordable quality office space for business development.”
Firms in the banking and finance sector, in particular, significantly expanded their footprint in Hong Kong, especially in Central, in recent years. As a result, Central office rents have increased 25% since 2014, and the vacancy rate has dropped to below 2% this year, close to its historical low.
While Chinese firms have increased their presence in Central, many MNCs that traditionally preferred Central and that previously placed only their support functions in decentralised areas, have been gradually priced out of the area. Accounting and law firms, in particular, have been moving to decentralised areas, driving demand and activity in those markets.
Kowloon East, featuring two up-and-coming commercial hubs, one in the Kowloon Bay and the other in the Kwun Tong, will be the major source of Grade-A office supply in the next few years
The average office rent in Quarry Bay, a commercial cluster on the east side of Hong Kong Island, just a 20-minute train trip from Central, is only US$6.40 (HK$50) per sq ft, which is less than one-third of that in Central. No wonder that this area is often the first choice for relocation. The arrival of banks, accounting firms and law firms from Central has also helped boost the image of the area.
Interestingly, these firms are relocating not sporadically, but in droves. This collective relocation helps drive synergies among similar firms, as well as providing significant savings in rental costs.
Kowloon East, on the other side of Victoria Harbour, is another popular relocation destination. Given the limited developable space and new supply in the traditional business districts, the government announced plans to develop Kowloon East as an alternative business district as far back as 2011, with the aim of providing affordable quality office space for business development.
Kowloon East, featuring two up-and-coming commercial hubs, one in the Kowloon Bay and the other in the Kwun Tong, will be the major source of Grade-A office supply in the next few years, with over 5 million sq ft of new office space expected to be completed in 2017-2020; after which the area will surpass Central as the largest office cluster in Hong Kong in terms of stock.
“Looking ahead, as the decentralisation trend continues in the coming years, the Hong Kong office market will be largely reshaped. Mainland firms, which are interested only in the core areas, will continue to flock to Central, therefore ensuring continued high rental levels there.”
The new supply of office space in Kowloon East will provide another feasible option for companies seeking to move out of the core areas or consolidate their operations.
Kowloon East has already attracted the back offices of many insurance companies and banks, given its affordable rental level of under US$3.85 (HK$30) per sq ft per month.
Looking ahead, as the decentralisation trend continues in the coming years, the Hong Kong office market will be largely reshaped. Mainland firms, which are interested only in the core areas, will continue to flock to Central, therefore ensuring continued high rental levels there.
Meanwhile, more MNCs will drive the new development of alternative locations. We are seeing what started as a cost-saving exercise drive the development of a multi-CBD office market in Hong Kong that is more in tune with the situation in other global financial capitals.
David Ji is Head of Research & Consultancy, Knight Frank Greater China.
