Hong Kong’s Central office space in demand as Mainland Chinese banks seen expanding

Property consultants have high hopes about the demand for Grade A office space in Hong Kong, as mainland financial institutions are likely to build a bigger footprint in the city due to Beijing’s “Going Out” policy.

Some analysts said that a weakening mainland economy would slow demand of office space in Central but rents in the area would still go up this year due to extremely low vacancy rates of 1.7 per cent as of the second quarter of 2015.

International property consultant Colliers International expected more mid-sized mainland banks would open offices in Hong Kong.

“Assuming a second batch of 15 mid-sized commercial banks in China set up their full offices in the next five years, the impact on Central will be a new demand of 450,000 square feet,” said Simon Lo, Executive Director of Asia Research & Advisory of Colliers International.

The assumption was based on the previous expansion pace by mainland banks.

“There were seven city commercial banks obtaining full service licenses in Hong Kong in the past five years. We believe the expansion pace will double as the approval time has shortened,” said Lo.

Hong Kong has a long history serving as a financial platform for big Chinese banks. For example, the Bank of China opened its first branch in Hong Kong as far back as 1917, the first Chinese state-owned bank to do so. Nowadays, in terms of real estate, these state-owned giants each occupy at least 100,000 sq ft in Central.

The Industrial and Commercial Bank of China leases several floors with naming rights at ICBC Tower in Central. Rather than leasing, the Agricultural Bank of China and China Construction Bank acquired their own buildings in Central for internal use.

Currently, there are a total of 11 Chinese banks licensed to operate in Hong Kong that occupy a total of around 780,000 sq ft in the city, according to Colliers.

Several mid-sized commercial banks operate representative offices and are yet to set up as licensed banks, said Lo. However, it is predictable they will look for more space once they obtain Hong Kong Monetary Authority approval to open branches.

City commercial banks initially open a representative office of 2,000 to 3,000 sq ft in Hong Kong but will expand the offices to 30,000 sq ft once they are allowed to set up full-service operations in the city, Lo said. Colliers expect rents in Central will go up 15 per cent in the whole of this year.

Cusson Leung, head of Hong Kong equity research and regional conglomerates and properties at JP Morgan, said in an interview earlier that a slowdown of the mainland economy would naturally lead to a contraction in demand by mainland institutions.

But Leung believes Central rents will still go up 5-10 per cent this year due to low vacancy and limited new supply of office space.

Central office rents reached HK$96.7 per sq ft in second quarter of this year, six per cent higher than the HK$90.4 per sq ft in the fourth quarter of 2014. Overall Central vacancy stayed low at 1.7 per cent in the second quarter this year, according to JLL.