Greater Bay Area to support Hong Kong’s office market in areas beyond central business district
- With companies moving their offices into areas beyond the city’s traditional central business district, decentralised office markets such as Hong Kong East, Kowloon East and Wong Chuk Hang are likely to benefit the most
Broadly speaking, the vision for the bay area plan is to further integrate the nine largest cities in Guangdong province with Hong Kong and Macau to establish an economic bloc.
The removal of barriers that limit the movement of trade, capital, information and people will allow various industries to flourish. Although specific details of the implementation of the plan have been patchy thus far, the latest outline has provided some clarity on the range of policies that are likely to be pursued.
For Hong Kong, the plan is to build on the city’s role as the key regional financial hub and for it to continue to act as a conduit between international capital markets, the bay area and the rest of China. It will remain a hub for professional services, transport, trade and aviation. The plan specifically identifies the city as a legal and dispute resolution centre for the Asia-Pacific and highlights the part it will play in the Belt and Road Initiative.
A broader economy will naturally provide plenty of opportunities for businesses to grow. Hong Kong’s financial and professional services sectors stand to directly benefit from the government’s plans to widen market access while promulgating supply-side structural economic reforms. In turn, this will directly translate into stronger demand for office space: mainland firms should continue to grow as they look to expand globally, while non-mainland firms can benefit from the improved market access that the bay area plan will bring.
With an increasing number of companies from the financial, insurance, real estate and business services sectors – more commonly referred to as FIREBS – moving their offices into areas beyond the city’s traditional central business district, decentralised office markets such as Hong Kong East, Kowloon East and Wong Chuk Hang are likely to benefit the most from this growing share of the business pie.
The growth of the FIREBS sector will also help boost rents in these decentralised office markets. Our analysis of leasing transactions shows tenants from the financial, insurance and real estate sectors typically pay above-market rent regardless of location.
In Hong Kong East, for example, law firms that were previously paying close to HK$100 per square foot per month in Central are now renting offices at closer to HK$60.All things being equal, this would suggest there is significant scope for rents to rise further, which would help justify the lofty prices being paid for offices in these locations.
Though the number of people employed in FIREBS in Central has fallen slightly from a high of 164,710 in 2008 to 161,280 in 2018, there is still plenty of demand for the real estate they have left behind. The opening of more cross-border investment channels and the central government’s commitment to promoting the belt and road policy will continue to drive long-term demand for office space from mainland companies as they seek to expand their business beyond their domestic market. In this regard, the trend of mainland companies establishing and leveraging on the prestige of a Central office address is likely to continue.
Central is not the only office location on their radar, however. Demand from mainland companies that spreads beyond Central may be further accelerated by the lack of space in the central business district and the arrival of companies from outside banking and financial services, the industry sector that has been the most active in recent years. In the past 18 months, we have already seen a greater number of mainland firms relocate or open offices on the fringes of Central, around Admiralty and into Wan Chai as they seek room to grow.
Moreover, the opening of the Express Rail Link has led to an uptick in demand for offices in Tsim Sha Tsui from mainland firms seeking to leverage on the proximity to the new cross-border transport hub.
The expected rise in demand for offices in Hong Kong will be dependent on when Beijing chooses to release more detailed policies regarding the bay area plan. As it stands, it would appear that the Central office market is likely to benefit most significantly over the short term as outward expansion of mainland companies has a greater impact on office leasing demand than the need for professional services from Hong Kong. However, as companies in the bay area grow and market access is broadened, we would expect this dynamic to gradually change and ultimately support the growth of office markets in decentralised areas.
Denis Ma is the head of research at JLL in Hong Kong
