Why Hong Kong’s office market has the edge over Singapore’s, despite the eye-popping rents in Central
- While it’s easy to assume Hong Kong’s runaway prices and growing instability will benefit competitors, including the Lion City, that doesn’t take account of the city’s decentralised, mature office submarkets that Singapore has yet to fully develop
The refuge receiving the most attention is Singapore, Hong Kong’s arch-rival in the battle for dominance in Asian finance.
In the real-estate sector, the city state enjoys several advantages over its chief competitor. For starters, occupancy costs for Grade A office buildings – which include rents, service charges and government taxes – in Singapore are more than two-thirds less than in Hong Kong’s Central district, and roughly half those in London and New York. What is more, Singapore is the preferred location for the regional headquarters of global technology firms, which benefit from favourable government policies and access to strong pools of talent.
Second, Singapore has kept its housing market on a tight regulatory leash for the past decade to avoid the runaway price growth witnessed in Hong Kong. Since 2014, property values in the two cities have diverged sharply, with secondary home prices in Hong Kong continuing to skyrocket while remaining broadly stable in Singapore.
According to the latest edition of UBS’ Global Real Estate Bubble Index, published in September, Hong Kong has experienced the biggest decoupling of house prices from local incomes among 20 leading residential markets, with a skilled service worker needing to work a staggering 22 years to afford a 650 square foot flat near the city centre.
However, Singapore is by no means cheap. Even in the office market, the city state was the 14th-most-expensive location out of 122 markets tracked by CBRE, a property adviser, in a report on prime office occupancy costs published last week.
Not only are office rents in Singapore pricier than in Paris and the Lower Manhattan business district of New York, occupancy costs in the city state shot up more than 17 per cent between the end of the first quarter of 2018 and the end of March, the sharpest increase in the Asia-Pacific region and the third-strongest rise globally, CBRE notes.
Moreover, Singapore lacks a large stock of cheaper and high-quality office space in noncore districts to help it remain cost-competitive and provide occupiers with alternative locations and higher-specification buildings that better suit their requirements.
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This huge price differential is part of the reason why decentralisation has proved a popular occupier strategy in Hong Kong. As more multinational and smaller companies lease office space outside the city’s core districts – not only to reduce rental costs but, just as importantly, to meet the growing demands of millennials for flexible working space and mixed-use environments – decentralisation has become the main driver of the market, easing pressure on the supporting infrastructure of core districts and creating a more sustainable and vibrant office market.
The strength of demand for decentralised office space in Hong Kong has been most apparent since leasing activity from mainland firms began to cool significantly. In the first quarter of this year, net take-up in Kowloon accounted for more than 70 per cent of leasing volumes in Hong Kong, data from CBRE shows.
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In Singapore, by contrast, decentralisation has made little headway since the Urban Redevelopment Authority (the national planning agency) started working on a strategy in the early 1990s. With less of an incentive to release land parcels for office development in noncore locations, the government has focused on selling plots in the Central Business District, leaving Singapore with a tiny stock of high-quality decentralised office space.
What is more, office buildings in Singapore’s central business district are mostly single-use developments located in older areas of the district. The dearth of supply in noncore locations has not only narrowed the rental gap between the central business district and decentralised areas – the discount is currently only 30-40 per cent, according to Jones Lang LaSalle, not high enough to encourage companies to relocate – it has deprived Singapore of the popular mixed-use schemes common in Hong Kong’s office market.
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Still, the city state is at least moving in the right direction. In March, the URA announced a series of incentives aimed at repositioning Singapore’s central business district “as a 24/7 mixed-use district”. The plan offers owners of older buildings higher plot ratios if they convert their developments into mixed-use schemes.
If enough landlords take advantage of the offer, older stock will be withdrawn from the market, increasing demand for relocations and encouraging the government to release more land for office development in noncore districts.
However, Singapore has a mountain to climb in fostering the decentralisation of office space. If occupancy costs in the central business district keep rising at the current rate, the lack of progress in decentralisation will become a major liability, strengthening the appeal of Hong Kong’s office market.
Nicholas Spiro is a partner at Lauressa Advisory
