COMMERCIAL PROPERTY
Concrete Analysis
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Hong Kong’s much anticipated office supply boom now finally under way

Three sites on government list signal the beginnings of bigger trends in local office market

PUBLISHED : Monday, 29 February, 2016, 10:11pm
UPDATED : Tuesday, 01 March, 2016, 5:51pm

Last Thursday, the government released its land sale programme for the upcoming financial year, kick-starting the foundations for the much anticipated supply boom in the city’s office market.

With vacancy rates having tightened down to their lowest levels in over 20 years and Central now once again the most expensive office market globally, the release of new commercial land supply could not come at a better time.

A total of eight commercial development sites were included in the programme but three sites in particular signal the beginnings of bigger trends that we expect to develop in the local office market over the next five to 10 years.

The inclusion of the Murray Road car park marks the first time the government has directly offered a commercial/office development site in Central for sale in more than 20 years. The site, which is located on the inner fringes of the city’s premier office market, has the potential to deliver a building with 20,000 sq ft floorplates, which is attractive to wide range of tenants from the banking, legal, accounting and professional services sectors.

We expect considerable interest from Hong Kong’s biggest developers. However, don’t be surprised to also see strong interest from mainland China banks. The Murray Road car park provides an opportunity for these banks to own a flagship asset in the heart of the city’s CBD, a highly illiquid market where trophy assets are generally held by a handful of landlords for long-term investment and are rarely, if ever, traded.

Kowloon East is fast becoming the location of choice for the city’s insurance and shipping sectors

Across the harbour, the development of Kowloon East will get a huge shot in the arm with the release of the first two development sites in Kai Tak. The sites, which have the potential to yield more than 1 million sq ft of commercial office floor space, are located within a stone’s throw of the future Kai Tak MTR station. For those eyeing Kowloon East as a future back-office location, sites in Kai Tak will be best positioned to benefit from the forthcoming rail infrastructure linking into Central.

Depending on when these sites are made available for sale, the first commercial office buildings in Kai Tak could potentially be available for occupation by as early as 2020. Kowloon East is fast becoming the location of choice for the city’s insurance and shipping sectors and now a greater number of foreign investment banks are taking a closer look after Citi’s purchase of the entire West Tower at One Bay East in 2014. The demand to establish larger offices outside Central will only intensify as rents rise further in Central on the back of more mainland demand.

That’s not to say that mainland players should be taken out of the equation when it comes to Kowloon East. A recent spate of acquisitions mainland companies outside of Central suggests a change in attitude from this cohort, who have historically preferred to locate their operations in Central. China Life’s purchase of the whole of the East Tower at One HarbourGate in Hung Hom at the end of last year demonstrates their growing openness to consider office markets in Kowloon to headquarter their operations. It joins China Construction Bank, which acquired an office tower for self-use in Kowloon Bay in 2012.

Whether mainland companies participate in the land sale process remains to be seen given their historic preference to purchase turn-key projects rather than engage in development. Still, their willingness to own in Hong Kong could provide joint venture opportunities with local developers and potentially mainland developers, who have been increasingly active in the city’s residential land sales market.

The upcoming land sale programme represents only the tip of the iceberg, in terms of government land supply for Central and Kowloon East.

In Central, another five government sites with the potential to deliver more than 3 million sq ft of commercial floor space will likely be tendered in the coming years, including prime sites situated on the foreshore of new reclamations, which tick all the boxes of mainland companies' requirements: central location, high visibility, branding/naming rights, unobstructed harbour views and good feng shui.

Another highly sought after site will be the current cluster of government buildings – Immigration Tower, Revenue Tower and Wanchai Tower – in Wan Chai. This site will have the potential to yield more than 2 million sq ft of floor space when it is eventually made available to the market and will be conveniently located next to the future Exhibition MTR station on the Sha Tin-Central rail link.

In Kowloon East, government land supply has the potential to add a further 13.6 million sq ft of commercial floor space into the submarket. Importantly, a large portion will be in Kai Tak.

Given the uncertain outlook forecasted for the local economy, there are some concerns that the release of all this land may potentially lead to an oversupply of commercial office space, which could in turn drag on rents. While this may not be welcoming news for landlords, it would definitely be good for tenants and the long-term competitiveness of Hong Kong; especially given the large amount of construction in neighbouring cities in the Pearl River Delta such as Guangzhou and Shenzhen. To this end, it is important that the cost of real estate is taken out of the equation when companies decide where best to locate and grow future offices in the region.

Denis Ma is head of research at JLL