CONCRETE ANALYSIS

Cities work hard to lure big business

Property can play a key role when companies must decide whether to locate their regional headquarters in Hong Kong, Singapore or Shanghai

PUBLISHED : Wednesday, 06 November, 2013, 5:10am
UPDATED : Wednesday, 06 November, 2013, 5:10am

In line with the growth in size and significance of the Asia Pacific, an increasing number of companies are setting up regional headquarters in the region.

Hong Kong and Singapore have competed to be the prime location for key regional functions, and more recently Shanghai has joined the contest, with the establishment of the Shanghai Free Trade Zone boosting the appeal of the city further.

When making location decisions, proximity to markets and economic strength are key criteria. Other considerations are a well-developed legal and regulatory framework, the cost of doing business, and the quality of infrastructure and human capital. On an analysis of data covering these six factors, Singapore and Hong Kong, both strong all-rounders, rank as the most attractive.

Direct access to the mainland makes Shanghai appealing, as more companies see the country not just as a point of sale market, but also as a place where they can locate research and development functions. According to government statistics, regional headquarters in Shanghai have risen from 53 in 2003 to 403 in 2012.

However, the conventional analytical framework for looking at city competitiveness neglects the role of property, which is a flaw. Property is usually seen as a derived demand, with growth in city attractiveness generating demand, and supply responding accordingly. In fact, property has an important role to play in attracting businesses, not least in the sense of affordable occupancy costs, but also in the availability of suitable space and market predictability.

Both these factors affect corporate budgeting and occupational patterns. Hong Kong is one of the world's most expensive places to do business, with prime CBD rents almost twice as high as those in Singapore and Shanghai.

However, it is interesting to see how these three cities compare on other key occupier metrics. One differentiator is the quantity and quality of office stock. The larger the office stock of a city the more firms and workers it can accommodate, and hence the more will be the scale economies and benefits of agglomeration.

The Marina Bay area development in Singapore is one example of a successful property-led strategy. Its prime waterfront location, high specification, and column-free structures were master-planned and purpose-built to world-class standards to support Singapore's vision of being a global financial and business hub.

In addition, the office space in Singapore offers a great diversity in size, age, and quality, making it easier for a range of businesses to find appropriate space, especially those in niche sectors and service providers that are vital to operations.

While Hong Kong has many super-prime buildings, a lack of diversity in the right location can be a problem when firms respond to changing occupational requirements. Not only is Hong Kong's office stock scarce, it is also ageing, with around half the grade-A office stock being more than 20 years old.

The Central district in particular suffers from old stock. Lack of land, combined with the fact that many of Hong Kong's buildings are owned on a floor-by-floor (strata-titled) basis, or sometimes even a unit-by-unit basis, makes it difficult to replace older buildings or upgrade existing stock.

Indeed, ownership structure is an important issue. Strata-titled offices typically do not have the large floorplates that big multinational companies seek. High owner-occupation levels, which tend to be the case for markets on the mainland can also exacerbate supply shortages in some areas.

Shanghai enjoys the advantage of a wide hinterland, with a further 7.5 million square metres of office space expected to be added between now and 2017.

However, due to a relatively-high owner-occupation level, options to base regional headquarters in Shanghai are not as abundant as the pipeline figures suggest. In comparison to Singapore and Hong Kong the office market in Shanghai still has a long way to grow in terms of diversity and maturity.

Owner-occupation is low in Hong Kong, but rising. There is increasing transactional evidence of owner-occupation deals by the finance and insurance industries. On the one hand, rising owner-occupation levels reduce space available; while on the other it strengthens Hong Kong's competitive position as a financial hub, attracting more occupier demand.

The high concentration of finance and insurance companies in the Hong Kong CBD can also be seen as a concern since it intensifies cyclical downturns. This makes corporate real estate portfolio management more difficult since market predictability is lower than in cities such as Singapore, where occupier diversity can cushion cyclical movements.

In an effort to increase competitiveness through the built-environment, Hong Kong has made extensive efforts to enhance office supply and is developing a second prime-grade office node in Kowloon East to facilitate decentralisation. Similar efforts have also been made in Singapore, where the government is further encouraging the development of commercial space outside the CBD to relieve congestion, as well as bringing the workplace closer to homes.

As Shanghai develops more mature and multi-tiered office stock beyond the existing CBD, similar migration also looks set to happen.

Competition between cities is under way. In a world of cost-cutting and efficiency optimisation, companies will be increasingly drawn to cities that offer the right combination of competencies and occupational efficiency. Property has an important role to play in shaping the future economic landscape of Asia Pacific.

Jade Tan is an assistant manager, forecasting & strategy research, DTZ

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