Warburg Pincus-backed Shanghai real estate firm eyes slice of co-working market as demand rises in Hong Kong

Kailong, a Shanghai-based real estate investment management company backed by US private equity fund Warburg Pincus, is planning to include a co-working element at all eight of its commercial properties in Hong Kong to boost returns.

The strategy shift comes in the wake of a growing demand for such spaces, after a successful experience in the city by other companies, such as New York-based WeWork.

Multi-function co-working space being created in Kowloon

“We will upgrade buildings to fit with the demand for shared offices,” said Ivan Ho, Kailong’s chief executive for its Hong Kong office.

Demand for co-working facilities in Hong Kong mushroomed by a fifth to 1.2 million sq ft in the five months to May, and according to figures from CBRE, 48 per cent of which is considered grade A office space.

“We plan to sell individual floors to investors or occupiers who want smaller spaces in the city’s core business districts,” said Ho.

Kailong was established in 2004, with Citibank, Starwood, Cargill, Rockpoint, Secured Capital Investment and real estate investors Stephen Roth and Cheng Hei-ming, a Hong Kong businessman, as its founding shareholders.

After a series of restructurings, its current shareholders are Cheng, its own management team, D&J China, Warburg Pincus and PAG Real Estate.

Ho joined the business in 2010 to focus on the Hong Kong market. The company has completed two funding rounds, raising a total of US$200 million and one Greater China fund of US$500 million.

The company has ploughed HK$4 billion (US$509.9 million), since the start of last year, into eight office properties in Tsim Sha Tsui, Wan Chai and Sheung Wan.

“Many Hong Kong and Chinese developers have their eyes on bigger property projects in Hong Kong, offering us more opportunities to buy smaller properties within central business district areas,” said Ho.

“We will upgrade properties, enhance their value and sell them to end users or investors,” he said.

Is the burgeoning co-working office market set to overheat?

Ho said their designs will focus on big areas allowing more social networking, and small meeting rooms, and he remains positive that co-working spaces will remain in high demand, despite interest rates entering an upwards cycle, and Beijing’s capital controls and closer scrutiny of outbound mainland investment.

Hong Kong’s strata-titled office investment levels hit a five-year high last year, worth HK$18.67 billion, according to global property agency JLL. But the level is likely to be eclipsed in 2018, with HK$15.39 billion already booked in the first half.

“The strong volume posted in 2017 and through the first half of 2018 has been supported by surging office prices,” said Denis Ma, head of research at JLL

Possibilities of collaboration with start-ups bring big companies to co-working spaces in Hong Kong

“The values of grade A offices increased by 17.5 per cent in 2017 and are already up 10.8 per cent in the first six months of this year.”

The strong increase in capital values has been driven sky-high, in part, by a roaring government land sales market, as well as the influx of mainland buyers.

Kailong’s Ho said the company was also studying the possibility of investing into Guangzhou, in Guangdong province, one of the 11 cities in the much-promoted “Greater Bay Area” – the Chinese government’s scheme to link Hong Kong, Macau, Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen and Zhaoqing into an integrated economic and business hub.

“Our fund wants to focus on first-tier cities in the Greater Bay Area, but Shenzhen is too expensive,” Ho added.