Concrete Analysis

Stock Connect scheme to boost growth of Chinese firms in Hong Kong

Mainland financial firms have great growth prospects in Hong Kong as the cross-border trading scheme prepares to launch

PUBLISHED : Tuesday, 09 September, 2014, 2:36pm
UPDATED : Wednesday, 10 September, 2014, 3:18am

As the launch of Shanghai-Hong Kong Stock Connect - a scheme allowing cross-border stock trading between the two cities - approaches, it is widely believed that mainland financial firms have geared up for the connection by actively recruiting talent and leasing new office space.

The reality is that while mainland firms have been looking to expand their footprint in the city, much of their requirements for office space remain relatively small - typically 5,000 square feet or less.

According to JLL's research, mainland firms accounted for about 25 per cent of all new lettings in the second quarter of 2014, up from 15 per cent in the same period last year. This take-up translates to about 16 per cent of all new floor space taken up in the second quarter.

Nevertheless, the growth prospect of these mainland firms is tremendous. Less than one in eight foreign companies with offices in Hong Kong are from mainland China, but the number of mainland firms in the city has more than tripled over the past decade since China's accession to the WTO in 2001. The relatively low presence of mainland companies in Hong Kong also suggests that the potential demand for office space over the coming years could be immense.

In fact, business expansion by mainland firms in recent years has already become one of the major drivers of the Central office market. JLL's data indicates that the share of new lettings by mainland companies in terms of total floor area has risen from about 9 per cent to 13 per cent since 2011.

This trend is especially notable among the Grade A1 buildings such as the International Finance Centre, which are considered prestigious and usually command higher rentals. An office address in an iconic building and prime location is considered an important signature statement and a superb "branding" opportunity for the largest enterprises worldwide, including mainland state-owned enterprises. In particular, premium buildings with sea views and a directory with big brand names in the same industry are highly sought after.

Mainland companies have, however, become increasingly mature in office selection and lease negotiation over the past few years. This is evident by a cluster of mainland companies forming in Sheung Wan looking for quality and proximity to Central at a lower cost.

While mainland companies might adopt a more cautious approach in expanding and upgrading their office premises initially, they can rapidly expand their premises once their Hong Kong branch status is confirmed. For example, a well-known mainland bank expanded from a small representative office to over 30,000 sq ft in just four years.

In addition, many mainland companies prefer owner-occupancy, standard practice for their headquarters buildings on the mainland, and will consider buying entire office buildings typically when their size requirement reaches above 80,000 sq ft. As such, they can employ their real estate assets as a hedging strategy against anticipated future inflation, bet on the potential growth of the property assets, in addition to mitigating lease negotiations and the volatile rental market.

The stock connect scheme is expected to further stimulate the growth of mainland firms in the city, accelerating office upgrades and expansion in the next six to 12 months. It is expected that mainland financial companies will directly benefit from the scheme and need to increase headcount in order to meet higher trading volumes.

Further to the new trading scheme is the emergence of mainland multinationals (MNCs). Hong Kong is usually viewed as being an ideal springboard for mainland MNCs looking to make their first foray into global markets. There is an estimated waiting list of a dozen mainland banks looking to open an office in Hong Kong - and many are seeking approval from regulators.

Against this backdrop, demand for staff and office space from mainland MNCs over the next few years is expected to be robust, which is a contrast to some international MNCs that are still going through the "rightsizing" process. In that regard, Hong Kong's future prospects will increasingly be tied to decision-making and the economy of mainland China.

As the size of mainland tenants continues to grow, Central is believed to benefit the most as it houses the largest number of premium Grade A office buildings. How to attract mainland companies to move in has now become one of the most discussed topics among landlords in Central.

Paul Yien is a regional director of markets at JLL Hong Kong