Property

Colliers International’s Nigel Smith Reflects On Hong Kong’s Property Landscape

Colliers International’s Nigel Smith Reflects On Hong Kong’s Property LandscapeThe pages of this magazine have been dotted — more like littered really — with comments from experts on pricing movement, development patterns and investment indicators for years. But the minds behind those comments remain enigmatic. A graduate of Reading University, a resident of Hong Kong since 1990 and a real estate professional for nearly 30 years, Nigel Smith is the freshly minted managing director at Colliers International. He chats with us about offices, trends and Hong Kong’s future.

Let’s start with your speciality: offices. The prime addresses are clustering in a strip on the north side of the island, narrowing the price and creating a concept of everything else. Is Hong Kong turning into Manhattan?

A little bit of history, which I find really interesting, is in order here. When you look at Hong Kong, the fall-off in rentals from district to district is the highest in the world. Go from Central to Wan Chai and rents are almost half price. It doesn’t quite continue going down half again but you just don’t get that level of fall-off in London. There are so many different industries that prefer certain locations. Tsim Sha Tsui and Causeway Bay were the traditional trading and manufacturing districts and Central for banking and finance for example. Industries would only jump between districts or even across the harbour if rents became too expensive.

Hong Kong is one of the world’s most volatile markets, primarily driven by lack of supply and ownership. It’s interesting to look at how the market has effectively formed by families as opposed to corporations that so often dominate other mature cities. In Hong Kong’s case many buildings are effectively owned by individuals or families who control companies that have been able to react faster to market changes. This has driven through shorter lease terms, which has forced tenants to look for alternative locations faster than they would have in other cities.

Coming full circle, what’s interesting is how these locations initially allowed larger multi-national corporations to achieve cost savings by separating front and back office operations but now are also being considered as front office hubs. Examples are Island East, ICC and Kowloon East. However, it will take time, much like Canary Wharf, to establish these new hubs until the infrastructure is in place.

As these new hubs form and draw demand from the traditional districts, I wonder if that will start to flatten rents and become more like London.

Is there ‘the rest’?

In some respects, yes. Take the development of Kowloon East and CBD2. With rents at almost a quarter of Central and half of TST, when new supply comes on stream in Kowloon East between 2017 and 2020, the rental gap will widen, polarising the market between the core Island districts and the emerging hubs. The significant savings will justify occupiers moving operations to the hubs as the core district rents continue to rise off the back of demand from Asian corporates, particularly PRC banking and finance.

What could be a fly in the ointment?

Commuters. The locations and distances are similar [to Manhattan], but they’re huge in the eyes of Hongkongers, so there will always be that rental differential. Of course the infrastructure works will have a positive impact but travel times will always be an issue when companies consider new hubs. When Standard Chartered moved to Millennium City in 1995, even then we were talking about the redevelopment of Kai Tak and the MTR line from Exhibition as a way to help persuade employees of the location.

Could the anchors at Central and Quarry Bay drag all the submarkets in between them up?

Yes. Everything on the Island will tend to shift upwards due to a lack of supply. But I believe it will look more like a crown in terms of the rental curve with Wanchai and Causeway Bay up but just below Central/Admiralty, lower for North Point and back up again for Island East. The big winners will be Wanchai and Causeway Bay, as owners develop better quality product to meet the higher needs of occupiers.

Do you see the office building itself changing?

People don’t just want basic provisions anymore. They want lifestyle and wellness to be a part of the work-life balance A successful project is one that creates a ‘shopping centre experience in the office environment’, but it’s not just about cafés and art shows; it’s also about the way we work and communicate and the speed to action.

Is sustainability sticking around?

Yes, but what is more important is understanding the difference between sustainability and the environment. Sustainability today is about the quality of workmanship and the sourcing of materials. Occupiers expect owners to have policies that meet global expectations and those that don’t comply will start to lose their competitive advantage. The good news is that the second and third generations of the major families are embracing sustainability and taking a longer term view. They focus less on short term gains and more on giving back to the community.

That’s good for business too.

Yes. The ‘build and they will come’ attitude has changed. Risk management is a critical factor in deciding upon a building or owner. In some respects, buildings are like an ‘insurance policy’, where the owner and occupier work more in partnership, building long terms relationships and trust.

The office sector is crucial to the economy. Is Hong Kong still a good investment?
Hong Kong will always be a gateway city benefiting from business in and out of China. Perhaps more importantly will be the emergence of the Pearl River Delta as a super-region with multiple investment opportunities. Business will continue to flourish but we need to be mindful of the rapid changes occurring and ‘keeping up with the times’.

How bad is the retail slump going to affect the city?

The critical point is that we’ve shifted away from being a tourist-dependent market to one that is more local consumer focused. Hong Kong people want variety, especially in food and beverage and the falling rents have enabled these sectors to enter the market. I am sure Hong Kong will weather the storm and find a healthy equilibrium.

So, what are the big challenges we’re looking at?

Globalisation will remain the big issue, with cost cutting exercises and new markets emerging. There’s been chatter about how interest rates will affect the market but Hong Kong is more sentiment driven, so residential prices will fall to an affordable level. Housing, schools and hospitals will remain high on the agenda but ultimately sustainability and the environment will be the biggest challenge for everyone.