Hong Kong’s competitiveness under threat as limited office land set to run out in 10 years
- JLL study estimates that government only has enough land on hand to accommodate 10 years of demand
- Upcoming business districts in Hong Kong East, Wong Chuk Hang, Kwun Tong and Kowloon Bay offer affordable alternatives to Central
Hong Kong faces a host of issues in the property sector. While the residential supply constraints grab the headlines, there is also an acute shortage of grade A office space in the world’s most expensive market. To make matters worse, the total land supply presently set aside by the government for future development is forecast to run out within 10 years.
Recent delivery of new supply has provided a limited window of opportunity for businesses to grow and move into more modern, efficient space, while also lowering their real estate costs. However, with a significant amount of this supply already pre-committed, and very limited new supply in the next two three years, we have been advising our occupier clients to move quickly in positioning themselves in the market, in many cases some years before their lease expiry, to ensure they can secure the best solution for their businesses.
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We believe Central will always be appealing to an array of tenants from diverse backgrounds. However, with rents at all-time highs and availability at historically low levels, only multinationals, Chinese financial institutions, and other financial and professional services based businesses that crave the cachet of the location can afford to be there.
Fortunately, for occupiers, the completion of new infrastructure projects coupled with the recent delivery of new office supply is accelerating the emergence of alternative commercial hubs that serve as viable, more cost effective central business districts.
Areas such as Hong Kong East, Wong Chuk Hang, Kwun Tong and Kowloon Bay are flourishing, and new locations such as Kai Tak will come online in the next decade. These districts are well served by public transport, and many are now mature offering a wide variety of dining, shopping and lifestyle amenities for workers, residents and visitors.
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From a cost perspective, Hong Kong’s office rents capture headlines globally, with Central at an all-time high of HK$140 (US$18) per square foot on average. However, this is also a misleading picture.
Five to 10 minutes’ drive from Central, grade A offices can be found at half the price, and another 10 minutes away, prices drop to a quarter of those in Central.
So the reality is that Hong Kong has office space available at a range of prices to meet the needs of all occupiers. Companies looking for open, flexible modern workspaces that improve productivity, encourage innovation, and attract the best talent can find large floor plates, amenities, and reasonable rental costs all within a 20 minute travel time to Central.
This is a unique feature of Hong Kong and one of the reasons the city is thriving and will continue to do so in the coming years.
However, companies that have missed the recent opportunities will have limited scope to move over the near term as there will be no significant new grade A office supply delivered until 2022. Moreover, these companies will be exposed to the high rental volatility that has historically characterised the core Hong Kong office markets.
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While little can be done to rectify this in the short term, as a global city, Hong Kong must evolve and adapt to continue to offer businesses a range of grade A space options at competitive pricing.
As a priority, we recommend that the government release more commercial sites to the market in the coming months rather than the traditional practice of “drip feeding” this supply over a longer period. Sites such as XRL (Kowloon station), GPO (Central) government offices in Wan Chai, and more Kai Tak sites should be pushed through to ensure the city retains a balance to the market not seen in recent years.
Over the longer term, the government must ensure that there will be enough office supply to support the city. In a research paper JLL released in September, we estimated that the government only had enough land on hand to accommodate 10 years of demand. If Hong Kong is to benefit from the stronger economic growth arising from the Greater Bay Area and Belt and Road Initiative, it needs to have an office market that will allow businesses to grow and also attract new start-ups.
Both land resumption and reclamation, two key sources of land supply, take a considerable amount of time to be realised. As such, the government must make inroads on these initiatives as soon as possible. Leaving it too late would affect Hong Kong’s competitiveness in the region and jeopardise its ability to benefit from the fast growth in the Greater Bay Area.
Hong Kong’s continued success as one of the world’s leading business and finance hubs will hinge on there being sufficient supply to accommodate demand.
Ben Dickinson is head of agency leasing at JLL in Hong Kong