More firms looking beyond Central for office space in coming years

Major changes are expected in the commercial market, with mainland firms playing a key role

PUBLISHED : Wednesday, 19 February, 2014, 5:10am
UPDATED : Wednesday, 19 February, 2014, 5:10am

Few commercial property markets have as volatile a history as Hong Kong. A total of 27 million square feet of new office space has been built in Hong Kong in the last 15 years alone. That equates to a staggering 30 per cent of the office supply currently in existence across the entire city.

Today, Hong Kong remains one of the most dynamic property markets in the world, in a historically strong landlord market, aided by limited office supply and low vacancies.

But is this situation about to start changing? Hong Kong looks to be preparing for a stage of extreme transformation in the lead-up to 2020.

An examination of the market suggests a shift is on the horizon which could redefine the dynamic between landlords and tenants. A number of factors are emerging, from the evolution of alternative office hotspots and completion of new public infrastructure, to the entry of Chinese corporates into Hong Kong and changing attitudes on tenure.

There are trends in play that will reshape the city's property market and as a landlord or occupier it is imperative to look ahead at how the market may look in 2020 in order to stay competitive and maximise returns.

Until now, the presence of mainland companies in the market has been less significant than might be expected. Their number has tripled in the last decade, but they still account for less than one in eight "foreign" companies in Hong Kong.

Looking forward, this is expected to change, with the entry of mainland companies playing a major part in redefining the market. This trend is particularly evident in the finance sector, which has long been a major driver of demand for office space. Many Western financial services companies have refocused priorities, slowing expansion and the recruitment of staff, but this shortfall will likely be made up by Chinese corporates.

It is expected that up to a dozen mainland banks are waiting to establish overseas offices in Hong Kong, and more second-tier banks will follow over the coming decade. This will cause a surge in staff numbers, driving up demand for office space through to 2020.

Central district is one of the most globally renowned central business districts. It also contains some of the most valuable office real estate in the world, despite a wide variety of building specifications. This, together with a dearth of available space, means Central is not necessarily the ideal location for many front office tenants of the future.

The breadth and depth of the sustainable agenda in Hong Kong is also expected to grow, with green buildings viewed as more attractive and marketable. This may become a competitive advantage in future, with landlords passing energy savings on to occupiers in a part of their bid to attract high-quality tenants.

These are some of the trends that are encouraging Hong Kong's transformation into a multinodal office market. Many decision-makers will now consider alternative, less dense locations that offer modern, high-specification buildings which are more sustainable and offer larger floor plates.

The evolution of front-office users outside Central is likely to materialise at first in Hong Kong East, which is attractive to corporate occupiers due to its existing portfolio of offices, retail outlets, hotels, and serviced apartments. This will be supported by the completion of the Central-Wan Chai bypass and Island Eastern Corridor link by 2018.

Kowloon East, which could also emerge in the longer term as a front office node, will continue to develop and thrive as a mid-office location for operational staff at large foreign companies, as well as for the front offices of non-finance corporates. The district is not dominated by a single landlord, so it is likely to grow with a diverse ownership structure, potentially to the benefit of occupiers.

The completion of the Exhibition MTR station on the Sha Tin-Central link, together with the release of new developable land, will eventually refocus the market on Wan Chai and Causeway Bay. The area is likely to be the primary choice for professional service providers acting for clients in Central and Hong Kong East.

This will be supported by the widespread development and enhancement of transport infrastructure across Hong Kong. The improved accessibility of these commercial districts will make relocation outside Central increasingly feasible for tenants.

A "sandwich" pattern of tenure has emerged in Hong Kong. A high proportion of large corporates and Chinese state-owned enterprises prefer owner-occupancy of entire buildings, while many small firms look to purchase floors or single offices within buildings. The leasing market sits between each.

Meanwhile, the new lease accounting regulations anticipated for 2017 may introduce fundamental changes to the decision-making criteria when leasing or buying a building. Against this backdrop, districts offering vast land supply and diverse ownership will become increasingly attractive to large occupiers.

Gavin Morgan, chief operating officer and head of leasing, Jones Lang LaSalle, Hong Kong.