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Second City

Second CityCould Kowloon East be the answer to Hong Kong’s office supply woes?

An office in the Central-Admiralty corridor, as we all know, is the musthave address for both local and multi-national corporations with an image to maintain and status to uphold. At this point in time, the prime office addresses at the Landmark, Prince’s Building, IFC, Exchange Square, Jardine House, Alexandra House, Cheung Kong Centre, Chater House, Pacific Place and Lippo Centre among a handful of others are full and space in them is coveted above all others. And with Hong Kong being what it is, no self-respecting staff working for the companies that makes up the tenant list in those towers want to be more than a few minutes from home — unless an active decision to live by the ocean sent them to Repulse Bay. It’s the reason Central- Admiralty has also become the district most packed with hotels (half a dozen five-stars operate in the area) and upmarket serviced apartments a stone’s throw away in Sheung Wan and Mid-Levels.

But Central-Admiralty has very little room to grow. With the exception of LHT Tower on Queen’s Road and Lai Sun’s project in the old Ritz-Carlton’s spot, there is no new office stock coming online until sometime around 2014 — or later. So it’s across the harbour we go, where upward of two million square feet is under construction for a potentially banner year in 2013.

At the end of October, Colliers International announced researched stating that Kowloon East could soon match Tsim Sha Tsui’s office rental rates, and that the new transport and land creation projects unveiled in the last policy address will indeed make the area into something of a second Central; an alternative CBD. Long considered an emerging business hub, Kowloon East — the area stretching from Kai Tak to Kwun Tong Road — currently boasts office stock in the neighbourhood of 11 million square feet, more than Island East, the traditional second Central to this point. “As Central’s Grade A office rentals in September 2011 remained 4 percent below the peak in July 2008, Kowloon East on the contrary registered a new record high at HK$30 per square foot per month last month, representing 12 percent above its pre-tsunami level,” said Simon Lo, executive director of research and advisory for Asia at Colliers.

The bigger picture makes it clear that whatever Kowloon East turns into, business hub or otherwise, it will be a few years in the making, even with the building boom. Lo is quick to comment that this is not a second Central, but another business district, and he’s quicker to agree that without adequate and appropriate housing and support facilities nearby, little is going to happen in the way of significant progress. Right now the area seems more fitting for back offices and support staff that are willing to live in what’s available close by. High-ranking executives will stick to Central. A glance at Hong Kong’s other existing business hubs makes that painfully clear: TST is rich with hotels to go along with serviced apartments on Nathan and Canton roads, and dining and shopping are among the best in the city. The West Kowloon area near Kowloon Station may be the new kid on the block, but the residences, retail and hotel development everyone expected to blossom in the wake of ICC’s opening is well underway. Kowloon East is in a very different position right now and Lo cites a low ratio of residential development as an issue that will need to be addressed.

“It’s why the government’s announcement of new infrastructure plans was so important,” says Lo. “Nothing is going to happen without infrastructure, so that has to be first.” The proposed monorail will connect the main MTR line to the more coastal areas and push rental and sales rates up as well as making the entire district more attractive. Nonetheless investor curiosity has been peaked. Colliers’ survey of blue chip tenants in Hong Kong indicated that over half of them would consider Kowloon East for relocation when a lease expired, and over onethird would consider increased investment in the district. For consumer investors, flats can’t be very far behind and it could make Kowloon East an area to keep an eye on.

The well-documented plans for Kowloon East include the aforementioned monorail (ready in 2023), an MTR link from Shatin to Central (2015) and conversion of existing industrial buildings into office space. But residences remain key, and the inability to create more is what has stalled Central and Island East.

Of course, this perfect storm of the right tenants, the right buildings and the right transit options is subject to any number of influences, among them demands from many quarters to transform the old Kai Tak into green space. As unlikely as it is for government to place more emphasis on environment than commerce, plans for Kai Tak are anything but firm. Regardless of that Kowloon East, for now, is the darling of the office property sector. “Investors are confident in the bright future of [Kowloon East’s] office market despite the weak global economy,” finishes Fiona Ngan, Colliers’ general manager office services for Kowloon. “We project office sales prices in Kowloon East to rise mildly by 2 to 5 percent in the next six months.” Can luxury Kwun Tong Road flats be far behind? We’ll check back in four years.