Though we may prefer not to take work home with us, it could be there anyway. Perhaps not in flash drives and file folders, but in how we choose the building we live in and what district it’s in. Each sector plays its part, but the office sector of the Hong Kong property market seems particularly crucial to its overall development. And it’s headed for some (maybe) radical changes in then next decade.
In a special office sector report earlier this year, Jones Lang LaSalle analysed the key factors that were likely to have the most impact on Hong Kong’s office market in the coming years — chiefly new supply, its impact on pricing and the growth of Kowloon East. Currently the SAR’s office rents are the highest in the world to go with a low vacancy rate, with Central the jewel in the crown. When movement happens in Central (investment drops, vacancies rise), people get squirrelly. Retail property here is also at a global high, but it doesn’t have the trickle down affect that office property does. Why?
“I think the reason why is the people. Ninety-five percent of Hong Kong is a service-based economy and when you think about it from that perspective everybody’s working in an office environment,” theorises JLL’s Head of Tenant Representation Brian Brenner. “Finance, logistics and government are the three biggest occupiers in town, everybody’s working in some capacity in those sectors. So when the buildings are full that usually means the unemployment rate is low. And they’re all living somewhere. That’s how it’s tied to the residential sector.”
It can be argued that office and residential form the symbiotic backbone of the real estate market here; where offices cluster, so to do apartments. But Simon Smith, head of research and consultancy at Savills notes, putting one sector ahead of another is tricky. “In terms of the top end residential market, financial and professional services firms often employ large numbers of expatriates who rent luxury apartments and help set the market. This is why historically Central office rents and prime residential rents have moved very closely together. If finance is booming more staff are brought in from overseas causing rents to rise and encouraging investors to buy.” With caution the defining force right now, few newcomers are moving to Hong Kong causing rents to fall, investors to incentivise agents or simply sell at a discount if desired rents are not met.
Of course the other way office and residential space go together is due to the cliquey nature of business. As it stands, Central and Admiralty (as well as oddball ICC) sit at the top of the rental ladder, heavy with financial industry front office and law firms — blue chip tenants. Move east to Causeway Bay and Wanchai and it becomes commercial businesses paying roughly half of Central’s rents. Quarry Bay is home to back offices, advertising, media and tech firms, at one-third Central rents. Then there’s logistics-heavy Kowloon, where rents are about one-quarter. Business like to cluster together simply because, “It makes the attrition risk lower,” says Brenner.
The Coming Surge
If the plans to create a second CBD in Kowloon East — the old Kai Tak area — pan out, that would instantly double the office space added in the last 15 years (28 million square feet). “With the Central to Shatin rail link passing through the area, and with so much developable land, most people would agree that this is the future of the Hong Kong office market. After all, where else in the territory can you find so many potential sites and where else could you realise such an ambitious planning vision?” says Smith. As Brenner sees it, that could lead to a nearly wholesale realignment of what the “core” office district is and who is in it.
“What we’ll see happening over the next five to ten years is the cost distribution will maintain itself but cost will start getting higher,” Brenner explains. “Hong Kong Island will be supply constrained. It will be attractive to front office occupiers driven by demand — big floor plates, high ceilings — and the residential catchment is changing. ICC was driven by demand, not by location or price. Canary Wharf in London is the same thing.” He can see the Island becoming a core district unto itself, similar to Manhattan. And as the price gap on island shrinks, current tenants will become more price sensitive and Kowloon East will start to look good. Logic would dictate residential rents and prices in or near that core (meaning, almost all of the island) could also creep up. More.
“I think the multi-year demand driver of the office market will be mainland firms — banks, insurers, asset managers and so on. Looking for branding and market presence, many of these corporates prefer Central,” Smith adds, also noting that many established cost-conscious multinationals might make the move to Kowloon East if they haven’t already decentralised. “A good example is the shift of the insurance industry to Kowloon East from Causeway Bay, which took place after the GFC.”
Not Where You Live
Whether that means we’re in for a rash or shiny new residential developments on the Kowloon side remains to be seen. “Anyone that has a piece of land is going to look at it from highest and best use. A lot of it comes down to zoning. But obviously the government has a plan on increasing the number of flats in Hong Kong and they’re looking at opportunities as it relates to Kowloon,” Brenner points out. The hurdle in organic office/home growth a individual landowners with individual interests. A controlled environment and careful planning à la Swire at Tai Koo and Hysan in Causeway Bay is a rarity.
“It will happen but it will take a long time. What will really drive the market is the infrastructure changes,” argues Brenner. Infrastructure like the Wanchai Corridor, the new MTR lines, connections to Wong Chuk Hang and the high-speed rail link to Guangzhou. “All that will drive where companies are located and why, and that will drive the residential [element]. You don’t want to be too far from the office.”
While that may hold traditionally true, more people are willing to make the commute from Discovery Bay, Clear Water Bay and Mid-Levels by transit, taking advantage of complimentary shuttles or driving, making where we work moot. “I think it’s a sign of Hong Kong maturing,” finishes Brenner. It’s positively Angeleno.