Hong Kong is facing a chronic shortage of grade A office supply that could spell doom for its status as a regional business hub, unless the government accelerates the release of land supply for the commercial sector, according to international property consultants. JLL said in a report on Tuesday that failing to ensure adequate land supply for office space was a risk as the government shifted its policy focus towards the residential sector. “Discussions around government land supply have focused on housing over the last few years,” said Joseph Tsang, managing director at JLL. “But the city’s office market is also experiencing similar issues, which is affecting the city’s position as a major business hub within Asia-Pacific.” Crypto firm takes floor at Li Ka-shing tower for record US$600,000 a month Indicative of the shortages to come, JLL says only a single grade A office development is due to be completed in 2020, reflecting a 30-year low in terms of new supply. That contrasts with a historical average of 2 million square feet of annual absorption over the past 30 years. Failure by the government to release adequate land for commercial development on an annual basis is one of the reasons the city has become the most expensive office market in Asia-Pacific, as the prime office vacancy rate has trended lower for the past 20 years, the consultancy said. “If the government fails to provide a steady pipeline of commercial land supply over the long term, Hong Kong will lose its competitiveness as a regional business hub within the Asia-Pacific region,” JLL said. Commercial land supply from future government land sales can be translated to an estimated 20.1 million sq ft of potential office space, which may be used up in 10 years if demand remains consistent, JLL said. Prime office rents have increased by an average of about 6.5 per cent per year over the past three years, while rents in Central have grown by 9.5 per cent per year. “As at the end of the second quarter this year, total occupancy costs for grade A office occupiers were 21 per cent and 54 per cent higher than those in Tokyo and Singapore respectively,” JLL said. “This significant rental differential brings into question whether large multinational companies are as willing to grow their headcount in Hong Kong compared with these other cities.” Souring sentiment snares buyers of world’s costliest office tower Another concern is that the supply of grade A office space in recent years has become increasingly reliant on land sold by the government, rather than redevelopment of privately held sites. “At present, all grade A offices set for completion in 2022 are derived from government land sales,” said Denis Ma, head of research at JLL. “This highlights the important role that the government has in ensuring that appropriate business accommodation is delivered to the market.” Ma said the government should be targeting land sales that can deliver a certain level of office space every year JLL’s report came after developer CSI Properties earlier in September suggested converting some residential land to commercial use to help ease the shortage. Only four out of 31 sites available in the government’s Land Sale Programme are commercial in the current financial year ending March 31 next year, with the remainder being residential. None of the commercial sites are near Central. “Current policies discourage the conversion of residential sites to commercial use. But commercial land in Central is even more scarce than residential land,” said CSI Properties executive chairman Mico Chung Cho-yee. Small shops face uncertain future near high-speed rail terminus The limited availability of office space in the central business district has sent the overall vacancy rate in Central to 0.8 per cent in May, the first time it has fallen below 1 per cent since 2001, according to Knight Frank. “There is only one plot for commercial development in Central, which is the car park [on Murray Road],” Chung said, referring to the land that Henderson Land Development won for HK$23.3 billion, or HK$50,064 per sq ft, in May last year. “I cannot find any [commercial] land for sale [in Central] now.” “There will be no commercial land supply on Hong Kong Island in 2020 and only one plot in Kowloon,” said Fiona Ngan, head of office services at Colliers International. However, she said that smaller sites, which may take two to three years to convert, may be able to help address the office shortage.