Colliers International White Paper: The Evolution of Office Space in Hong Kong

Page 1

The Evolution of Office Space in Hong Kong


Contents

2

Introduction

3

Infrastructure and diversification

5

Regional focus: Pearl River Delta represents a driver for growth

5

Major infrastructure projects under construction

6

Improved local transportation network

7

Government plans for further expansion of the Hong Kong rail network

9

Offices with easy access to public transport fetch higher rents

10

Assumptions of rental-premium change for the next 10 years

11

Rental growth of non-core locations to outperform core district

12

Grade A office rents by district in 2025

13

Fastest rental growth rate in Wan Chai and Causeway Bay

13

How will office locations and occupier demand evolve over the next decade?

15

Conclusion

18

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International


Introduction The high occupancy costs and shortage of office space remain a major challenge for multinational companies looking for a prime location to set up their regional headquarters in Hong Kong. The acute shortage of land for development is the main factor driving prices higher and making rents expensive. To maintain its position as the most dynamic financial hub in Asia, Hong Kong needs to expand its commercial landscape, while infrastructure spending can provide immediate economic stimulus. In this report, we address the new infrastructure links and their impact on how office locations will evolve over the next decade. We will review the development of new office locations. We will also examine new infrastructure projects and how they affect rental performance in decentralised locations. By comparing demand from office occupiers by district – core versus decentralised neighbourhoods – we can identify the specific types of industry demand and the likely demand drivers for office space in in the future.

CORE DISTRICT

DECENTRALISED DISTRICTS

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International

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4

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International


Infrastructure and diversification Hong Kong is the financial hub of Asia and competes with the major financial capitals around the world such as London and New York. The development of Hong Kong’s new central business district (CBD2), including Kwun Tong, Kowloon Bay and Kai Tak, is part of an all-encompassing plan for the city that will expand its commercial landscape and provide a long-term solution to its current lack of space. The plan will free up a vast amount of space for expansion by both local and international businesses. CBD2 should also facilitate business by providing a wide variety of quality hotels, residential property, offices, conference venues, retail outlets and transportation nodes. The government is also spending a vast amount on infrastructure projects to boost the city’s economic growth in the years to come. Infrastructure spending provides immediate economic stimulus, but the city also needs to ponder how it can upgrade and diversify its economy.

Regional focus: Pearl River Delta represents a driver for growth Hong Kong’s economic future is tied to the Pearl River Delta (PRD) in neighbouring Guangdong province. Hong Kong remains the nexus between the most dynamic economic region in China and the rest of the world. The territory also remains a high-end service provider, management centre and financier for much of the economic activity in the PRD. Hong Kong continues its integration with the PRD through improved infrastructure, including the Hong Kong-Zhuhai-Macao Bridge (originally scheduled for completion by late 2016 but it is now under review due to delays), the Guangzhou-ShenzhenHong Kong Express Rail Link (2017) as well as the Tuen Mun Western Bypass and Tuen Mun-Chek Lap Kok link (2018). These infrastructure upgrades are very positive for the domestic economy, paving the way for an upgarde and greater economic diversification. The strong infrastructure network within Hong Kong itself also promotes growth in trades and services.

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International

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Major infrastructure projects under construction 3 4

Guangzhou-Shenzhen-Hong Kong Express Rail Link (2017)

Tuen Mun-Western Bypass (2018)

NEW TERRITORIES

4

5

Tuen Mun-Chek Lap Kok Link (2018)

Shatin to Central Link (2020)

Chek Lap Kok Hong Kong International Airport

6 HONG KONG ISLAND

LANTAU ISLAND

1

Hong Kong-Zhuhai-Macao Bridge (originally scheduled for completion by late 2016 but it is now under review due to delays)

1

Hong Kong-Zhuhai-Macao Bridge (originally scheduled for completion by late 2016 but it is now under review due to delays)

2

MTR South Island Line (East) (end of 2016)

3

Guangzhou-Shenzhen-Hong Kong Express Rail Link (2017)

Kai Tak Monorail (2023)

2

South Island Line (East) ( 2016)

4 Tuen Mun Western Bypass and Tuen Mun-Chek Lap Kok link (2018) 5 MTR Shatin to Central Link (2020) 6 Kai Tak Monorail (2023)

The evolution of front offices to locations that are outside Central is likely to take place first in Island East

6

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International


Improved local transportation network Factors that drive tenants to relocate outside Central The evolution of front offices to locations that are outside Central is likely to take place first in Island East, which is attractive to corporate occupiers due to its strong 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, due in 2017.

Central-Wan Chai Bypass and Island Eastern Corridor Link Island Eastern Corridor Link

Central-Wan Chai Bypass (2017)

Island East

Central

Admiralty

Wan Chai

Wong Chuk Hang The scheduled completion of the MTR South Island Line (East) at the end of 2016 will attract tenants to the neighbourhood of Wong Chuk Hang. It will therefore facilitate the redevelopment and revitalisation of the large number of industrial buildings in the area for office use. That change will get added impetus from the 7 km South Island Line (East). That line will extend MTR services from Admiralty to the Southern District of Hong Kong Island and will have a train station in Wong Chuk Hang, just two stops from Admiralty. Admiralty will be the interlink station for four lines: Island Line, the Tsuen Wan Line, the South Island Line (East) and the Shatin to Central Link. There are several industrial-revitalization and redevelopment projects already under way in Wong Chuk Hang, but the area currently lacks a dominant developer capable of creating a coordinated and integrated array of business amenities. Wong Chuk Hang will be an interesting area for office development in Hong Kong driven by improving transport connectivity – it will be just seven minutes of travel time by MTR from Wong Chuk Hang to Admiralty station. The neighbourhood will become more attractive to corporate occupiers as the portfolio of offices, retail, hotels and serviced apartments improves.

South Island Line (East)

Admiralty

South Island Line (East) (2016)

Wong Chuk Hang Ocean Park South Horizons

Lei Tung

Source: Hong Kong government, Colliers

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International

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Shatin to Central Link

Kowloon East Several government initiatives in Kowloon East, including the development of CBD2, industrial revitalization, and an improved transportation network connecting the neighbourhood to the rest of the city, have encouraged both investors and occupiers to look into the opportunities in the district.

Tai Wai Hin Keng Shatin to Central Link (2020)

To Ka Wan

The construction of the Shatin to Central Link should help overcome the perception that CBD2 is a remote location. The railway link will connect Tai Wai to Admiralty via Kai Tak and is due for completion in 2020. The proposed monorail route to connect Kwun Tong, Kowloon Bay and Kai Tak will also improve connectivity for the CBD2 area. The 9 km elevated monorail system with 12 stations is expected to be completed by 2023.

Diamond Hill

Kai Tak

Ma Tau Wan Ho Man Tin

Hung Hom

Admiralty

Exhibition

Source: Hong Kong government, Colliers

The construction of the

Shatin to Central Link

should help overcome the perception that CBD2 is a remote location Kai Tak Monorail

Source: Civil Engineering and Development Department

8

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International


Government plans for further expansion of the Hong Kong rail network In September 2014, the government announced it is planning to build six new railway lines and one new station with a total investment of about HK$110 billion. The East Kowloon Line will take the biggest share at HK$27.5 billion. Construction is due to start in 2018 and end in 2026. The new services will shorten travel times and commutes within the territory. The focus of the new railway schemes is to support existing neighbourhoods and open up other areas for potential development. The investment in the expanded railway network will bring direct economic benefits, leading to a modern, efficient railway network.

bn Estimated government investment on transportation

Proposed Rail Lines Existing rail lines Proposed rail lines

Northern Link and Kwun Tung Station (HK$23b)

Proposed stations

Hung Shui Kiu Station (HK$3b)

NEW TERRITORIES

Tuen Mun South Extension (HK$5.5b)

East Kowloon Line (HK$27.5b)

Chek Lap Kok Hong Kong International Airport

Tung Chung West Extension (HK$6b)

LANTAU ISLAND

South Island Line (West) (HK$25b)

HONG KONG ISLAND

North Island Line (HK$20b)

Source: HKSAR Government

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International

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Offices with easy access to public transport fetch higher rents The attraction of being located close to railway stations is every bit as applicable to offices as it is to residential real estate. Offices near stations fetch higher rents than offices outside main business districts or farther away from public transport.

1985, with the section linking Admiralty to Chai Wan, and the section linking Sheung Wan to Admiralty opened in May 1986. Following those developments, the premium for annual rents for Grade A offices in Central narrowed to 45% in 1987 and 1988. The improved infrastructure connections directly led to a closing in the rental gap between core and non-core areas. Decentralised areas saw quicker rental growth around that time as a result.

Before the completion of the MTR Island Line, the premium for Grade A office rents in Central when compared with the neighbourhoods of Wan Chai and Causeway Bay averaged 56% in 1983 and 1984. The MTR Island Line opened in May

Grade A Office Rental Trend Central vs. Wan Chai / Causeway Bay

$35.0

Sheung Wan to Admiralty section opened in May 1986

Average Rental Premium 1983-1984: 56%

$30.0

140.0%

Average Rental Premium 1987-1988: 45%

120.0%

Rental Premium, Central over Wan Chai / Causeway Bay

Central Average Rent

Wan Chai / Causeway Bay Average Rent

Source: Rating and Valuation Department

10 The Evolution of Office Space in Hong Kong | April 2015 | Colliers International

4Q 1988

3Q 1988

2Q 1988

1Q 1988

4Q 1987

3Q 1987

2Q 1987

1Q 1987

4Q 1986

3Q 1986

2Q 1986

1Q 1986

4Q 1985

3Q 1985

2Q 1985

1Q 1985

0.0% 4Q 1984

$0.0 3Q 1984

20.0%

2Q 1984

$5.0

1Q 1984

40.0%

4Q 1983

$10.0

3Q 1983

60.0%

2Q 1983

$15.0

1Q 1983

80.0%

4Q 1982

$20.0

3Q 1982

100.0%

2Q 1982

$25.0

1Q 1982

Average Rent (HK$ / sq ft / Month)

160.0%

MTR ISLAND LINE Admiralty to Chai Wan section opened in May 1985

Rental Premium, Central over Wan Chai / Causeway Bay

$40.0


Assumptions of rental-premium change for the next 10 years Based on the above data, we conclude that the improved infrastructure connections to come linking the central business district and non-CBD locations will lead to a narrowing rental gap between core and non-core areas. Based on precedent, we can project a potential narrowing of 23 percentage points. During 1983 and 1984, two years before the opening of MTR Island Line, the average rental premium for Central stood at 56%. After the opening in 1986, the average rental premium contracted to 33% for the eight-year period between 1987 and 1994, representing a decline of 23 percentage points. The narrowing gap implies a quicker pace of rental growth in noncore locations, in percentage terms.

Grade A Rental Premium Central over Wan Chai / Causeway Bay 120%

MTR ISLAND LINE - Amiralty to Chai Wan section opened in May 1985 - Sheung Wan to Admiralty section opened in May 1986

100% Average Rental Premium 1983-1984: 56% 80%

Average Rental Premium 1987-1988: 45%

60%

Average Rental Premium 1987-1994: 33%

40% 20%

1Q 1994

1Q 1993

1Q 1992

1Q 1991

1Q 1990

1Q 1989

1Q 1988

1Q 1987

1Q 1986

1Q 1985

1Q 1983

1Q 1984

0%

Source: Rating and Valuation Department

RENTAL PREMIUM

56% 198

re o Two y 3-84 pen ear ing

befo

201

4

re o Two y-15 pen ear ing

befo

2 Cau O 017 s and eway B pening Islan ay-W of d Ea anc st C hai B orrid ypa or L ss ink

19

ning 85-8 by p 6 has e

Ope

Full 198 co 6 Isla mpleti nd L on o ine f

20

8 ye18-20 ars in to25 tal

19

8 ye 87-1 ars 994 in to tal

RENTAL PREMIUM

33%ĂŞ The Evolution of Office Space in Hong Kong | April 2015 | Colliers International 11


Rental growth of non-core locations to outperform core district Between 2006 and 2014, the rental premium of core over non-core locations contracted significantly thanks to the onset of the global financial crisis in 2008, its fallout, and the trend of increased decentralisation by cost-sensitive tenants. For example, the rental premium of Central over Wan Chai and Causeway Bay declined from 101% in 2006 to 46% in 2014. The premium between Central and Island East fell from 178% to 103%. Central’s premium over Kowloon East also declined substantially from 249% to 159%. For the next 10 years, we conclude that the rental premium of Central over Wan Chai and Causeway Bay will narrow from 46% in 2014 to 23% in 2025, fundamentally driven by the improved infrastructure development of the Central-Wan Chai Bypass and Island Eastern Corridor Link.

The Island East area will also benefit from the improved transportation network. As a result, we project that the premium for Central over Island East will contract from 103% in 2014 to 80% in 2025. The premium between Central and Kowloon East will fall from 159% to 136% over the same period. In conclusion, the pace of rental growth in non-core locations of Wan Chai and Causeway Bay, Island East and Kowloon East will outperform the rate of growth in the core district of Central over the next decade. It is likely that Kowloon East will witness stronger take-up than Hong Kong Island, due to the sizable volume of new supply in the district, where it can offer major cost savings for occupiers.

Grade A Rental Premium Core over Non-core in 2006, 2014 and 2025

249%

250%

178%

200%

159%

150%

101%

100%

50%

46%

103%

136%

80%

23%

0%

Central over Wan Chai / Causeway Bay

Central over Kowloon East

Central over Island East 2006

2014

2025

12 The Evolution of Office Space in Hong Kong | April 2015 | Colliers International


Fastest rental growth rate in Wan Chai and Causeway Bay premium predictions, rents in decentralised locations – Wan Chai/Causeway Bay, Island East and Kowloon East – will record a CAGR of 7.3%, 6.8% and 6.6%, respectively. Simply speaking, the pace of rental growth in Wan Chai and Causeway Bay as well as in Island East will outperform Kowloon East in the next decade. But all those districts will outperform Central.

For projection purposes, we assume rents in Central will follow the local economic performance. The Economist Intelligence Unit (EIU) predicts that Hong Kong’s real GDP growth will range from 2.0% to 3.3% per year between 2015 and 2025, while annual inflation will rise between 2.5% and 4.4%. We project Central rents will increase 83.5% over the next 10 years to HK$168.1 per sq ft per month, or a compound annual growth rate (CAGR) of 5.7%. Based on the aforementioned rental

GRADE A OFFICE RENTS BY DISTRICTS IN 2025 AVERAGE RENT (HK$ / SQ FT / MONTH ON NET FLOOR AREA BASIS)

2006

CENTRAL

WAN CHAI / CAUSEWAY BAY

ISLAND EAST

KOWLOON EAST

$77.1

$38.5

$27.8

$22.1

2014

$91.6

$62.9

$45.2

$35.4

2025 F

$168.1

$136.9

$93.5

$71.3

RENTAL CHANGE 2006 to 2014

18.8%

63.4%

62.7%

60.3%

*CAGR

2.2%

6.3%

6.3%

6.1%

2014 to 2025

83.5%

117.8%

106.9%

101.4%

*CAGR

5.7%

7.3%

6.8%

6.6%

Remarks: *Compound Annual Growth Rate

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International 13


Hong Kong will remain a leading financial centre in the next decade, which in turn will continue to support demand for business and professional services

14 The Evolution of Office Space in Hong Kong | April 2015 | Colliers International


How will office locations and occupier demand evolve over the next decade? Despite the threat of high rents and lack of space in Central, we expect that Hong Kong will remain a leading financial centre in the next decade, which in turn will continue to support demand for business and professional services. The corporate expansion in the accounting and legal sectors in recent years was to a signficant extent caused by the surge in initial price offering (IPO) activity in Hong Kong. Chinese corporations are also increasing their presence in Hong Kong to improve their access to capital and financing. The development of RMB businesses and the Shanghai-Hong Kong stock connect scheme, establishing new fund-flow connections with the mainland, will broaden Hong Kong’s financial market and will create more business opportunities in the banking and finance industries.

Central The well-established submarket of Central has developed into a concentrated cluster of banking, legal and financial services, as well as the Asia or global headquarters of many multinationals, including law and accounting firms. Central will continue to serve as the centre of trade and financial services. The growth of Chinese corporates plays a major part in redefining the market, and remains the key driver of demand for office space. We expect there will be further demand from Chinese firms over the next decade, especially second-tier mainland financial institutions, when the Shanghai-Hong Kong Stock Connect and trading volume gathers momentum. Planning for a Shenzhen-Hong Kong stock link is also under way.

On the other hand, it is doubtful that Western financial services companies will expand aggressively, particularly when compared with past growth. The strategies of such banks and other financial institutions have changed and they have adopted more-efficient business models that require fewer staff to operate. It is likely that multinational tenants that require large floor plates will continue to move out of Central and Hong Kong’s traditional core into more fiscally responsible districts.

The centre of trade and financial services

Wong Chuk Hang Wong Chuk Hang will be an interesting area for office development in Hong Kong. Over time, it may well develop into an office market for international retailers as well as the back offices of global companies and professional firms. However, the current office stock size in the area is yet to reach its critical mass as an office node. Taking multi-ownership development in Wong Chuk Hang into account, there is with an existing office stock of 1.3 million sq ft (gross), which is yet to reach the critical mass for a minor office node, which requires a minimum stock of about 2 million sq ft. However, the sites currently identified in Wong Chuk Hang for office use will bring an additional 1.57 million sq ft to the market, resulting in a total of 2.9 million sq ft. and passing that node threshold.

Some of the buildings in Wong Chuk Hang have a structure of multiple ownership, since projects such as One Island South, W50 and Global Trade Square were offered for strata-title sale. There are several single-ownership developments in the area too, such as 38 Southside, Genesis, Vertical Square and a project at 41 Heung Yip Road. Still, Wong Chuk Hang has quite a few buildings with smaller floor plates – usually below 10,000 sq ft – which means it can capture demand from small-andmedium sized enterprises.

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International 15


The vast majority of large occupiers prefer to be in a building owned by a single landlord for ease of management and smoother lease negotiation. More developers are establishing a footprint in Wong Chuk Hang, such as Swire Properties and K.Wah. Some landlords are willing to offer flexible lease terms, more-negotiable rents or offer naming rights in order to capture multinational corporate tenants. However, several new office projects in Wong Chuk Hang struggle to meet the criteria set out by some multinational occupiers. That is because the size of the floor plate is relatively small, and such tenants do not want to be spread over multiple floors. Those multinationals have a preference for buildings with floor plates in excess of 10,000 sq ft. When rents become too expensive in core areas, some businesses are forced to find cheaper real estate elsewhere. Wong Chuk Hang will not just offer cost savings for occupiers. With improving transportation connectivity – the pending station in Wong

Chuk Hang will mean the travel time is just seven minutes by MTR to Admiralty station – the area can capture demand from tenants such as architectural and design firms, international fashion retailers, the back offices of multinational companies, professional firms as well as artists and the creative industries in general.

Architectural and design firms, international fashion retailers, the back offices of multinational companies, professional firms as well as artists and the creative industries in general

Island East Taikoo Place became the first successful decentralised office hub when Swire Properties completed seven office towers in the early 1990s, converting mostly industrial land. The area has attracted tenants such as information/technology and trading firms, insurance and telecom corporations, as well as advertising companies. Since the construction of One Island East, the area has developed into a more diverse business hub, encompassing the back-office functions of banking and finance companies. Swire Properties is now further redeveloping Taikoo Place in a project that will bring about 2 million sq ft of office space to the market by phases between 2017 and 2025. The limited supply of quality office space on Hong Kong Island has always been a challenge for large occupiers. Many cost-sensitive tenants find office rents in the submarket of Central hard to afford. They are searching for opportunities in decentralised areas. Supported by the completion of the Central-Wan Chai bypass and Island Eastern Corridor Link by 2017, the Taikoo Place overhaul is providing buildings with large floor plates and will continue to capture demand from cost-sensitive tenants, such as insurance companies, trading and I/T firms. Most importantly, the district can potentially capture front office operations of those companies or even entire banking operations relocating to Island East. The district is attractive to corporate occupiers due to its existing portfolio

of offices, retail outlets, hotels and serviced apartments. Since the area is essentially owned and managed by Swire Properites, it also fits the criteria of sizable occupiers who prefer singlelandlord ownership for the ease of building management and lease negotiation.

Insurance companies, trading and I/T firms or even entire banking operations

16 The Evolution of Office Space in Hong Kong | April 2015 | Colliers International


Kowloon East Kowloon East, traditionally a residential and industrial area, has undergone a major facelift in recent years. The transformation of Kowloon East into Hong Kong’s CBD2 is under way. The back office of banks, insurance companies, sourcing firms and quasi-governmental organisations account for the largest amount of office space in the area. Some I/T companies and retail companies have followed that move into the neighbourhood. The future node will continue to develop and thrive, driven by improving transport connectivity with the rest of Hong Kong, and most importantly, the sizable volume of new office supply. Kowloon East is the location accounting for the lion’s share of new supply in the city. A total of over 12 million sq ft of commercial space is expected to be completed in Kowloon East in the next 10 years through 2025. The improved accessibility of Kowloon East will make relocation outside of Central more feasible. The high rents and high fit-out costs in the Hong Kong Island CBD now pose a major challenge for companies seeking large office spaces. Kowloon East, as a new decentralised office hub, will offer significant cost savings for occupiers. 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. Kowloon East will be a mid-office location for operational staff, as well as for the front offices of non-finance companies. Leasing demand will continue to be underpinned by a group of tenants on Hong Kong Island seeking possible options to rationalise their rental outgoings by relocating across the harbour. The area is likely to be the primary choice for professional-service providers. Given the limited supply of new and low-cost options on Hong Kong Island suitable for companies looking to split front-office operations from middle- and back-office functions, Kowloon East will continue to evolve into an attractive and feasible location for split-office operations, particularly from the banking and finance industries.

The primary choice for professional-service providers

Central will continue to serve as the centre of

trade and financial services. The growth of

Chinese corporates plays a major part

in redefining the market, and remains the key driver of demand for office space

The transformation of Kowloon

CBD2 is under way.

East into Hong Kong’s

The back office of banks, insurance companies, sourcing firms and quasi-governmental organisations account for the

largest amount of office space in the area

The Evolution of Office Space in Hong Kong | April 2015 | Colliers International 17


Conclusion Hong Kong’s Central district continues to be the most expensive place in Asia to rent office space. However, the high occupancy cost could ultimately weaken the overall competitiveness of the city as a business location. In this regard, a new wave of office development will accommodate future economic growth. There are a number of new business locations evolving in Hong Kong over the next 10 years. We have highlighted several districts, including Island East and Kowloon East, believing there is potential for them to emerge as core office locations for most industry segments, including professional services and banking and finance. Although Kowloon East has been earmarked by the government as a key office location for the future, the market will first develop along Hong Kong Island before making an eventual jump across the harbour.

The improved transport connectivity between decentralised areas and the rest of Hong Kong will surely lead to higher rents in those areas, resulting in a narrowing rental gap between core and non-core districts. In other words, the pace of rental growth in the non-core locations of Wan Chai and Causeway Bay, Island East and Kowloon East will outperform the core district of Central over the next decade. Supported by the completion of the Central-Wan Chai bypass and Island Eastern Corridor Link, due in 2017, the rental growth of key business districts on Hong Kong Island, including Wan Chai, Causeway Bay and Island East, will outpace Kowloon East. However, Kowloon East is likely to witness stronger take-up than Hong Kong Island, due to the sizable volume of new supply in the district, where it can offer major cost savings for occupiers.

GRADE A OFFICE RENTS BY DISTRICTS IN 2025 AVERAGE RENT (HK$ / SQ FT / MONTH ON NET FLOOR AREA BASIS)

2006

CENTRAL

WAN CHAI / CAUSEWAY BAY

ISLAND EAST

KOWLOON EAST

$77.1

$38.5

$27.8

$22.1

2014

$91.6

$62.9

$45.2

$35.4

2025 F

$168.1

$136.9

$93.5

$71.3

RENTAL CHANGE 2006 to 2014

18.8%

63.4%

62.7%

60.3%

*CAGR

2.2%

6.3%

6.3%

6.1%

2014 to 2025

83.5%

117.8%

106.9%

101.4%

*CAGR

5.7%

7.3%

6.8%

6.6%

Remarks: * Compound Annual Growth Rate

In this study, we have also identified the likelihood of specific types of industry demand for office space in these areas. In Central, the growth of Chinese corporates will play a major part in redefining the market, and remains the key driver of demand for office space. We expect there will be further demand from Chinese firms over the next decade, especially second-tier mainland financial institutions, when trading volumes for the Shanghai-Hong Kong Stock Connect gather momentum. In Island East, the redevelopment of Taikoo Place is providing buildings with large floor plates. That will continue to capture demand from cost-sensitive tenants, such as insurance companies, trading and information/technology companies. Most importantly, the district could potentially capture frontoffice operations for those companies or even see entire banking operations relocate to Island East. Meanwhile, Wong Chuk Hang could be a niche office market for international retailers, as well as the back office of global companies and professional firms. However, the current amount

of office property in the area (an existing stock of 1.3 million sq ft) is yet to reach critical mass and make it a minor office node, which requires a minimum of about 2 million sq ft. Still, Wong Chuk Hang will offer cost savings for occupiers, and will also soon have much-improved transportation connectivity. As a result, the area can capture demand from tenants such as architectural and design firms, international fashion retailers, the back offices of multinational companies, professional-services companies, artists and creative industries in general. Kowloon East will ultimately thrive as a major source of office space, emerging as a “second CBD,” where it will be a mid-office location for operational staff and front offices for non-finance companies. Leasing demand will continue to be driven by a group of tenants on Hong Kong Island seeking possible options to rationalise their rental outgoings by relocating across the harbour. Kowloon East will be the primary choice for professional-service providers and it will continue to evolve into an attractive and feasible location for split-office operations, particularly for the banking and finance industries.

18 The Evolution of Office Space in Hong Kong | April 2015 | Colliers International


Office Services Specialists in Hong Kong and Kowloon Wendy Lau Executive Director | Office Services | Hong Kong +852 2822 0550 wendy.lau@colliers.com Individual Licence : E-141423

Fiona Ngan General Manager | Office Services | Kowloon +852 2822 0751 fiona.ngan@colliers.com Individual Licence : E-197789


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For further information, please contact: Simon Lo Executive Director | Research & Advisory | Asia +852 2822 0511 simon.lo@colliers.com Joanne Lee Senior Manager | Research & Advisory +852 2822 0557 joanne.lee@colliers.com Wendy Lau Executive Director | Office Services | Hong Kong +852 2822 0550 wendy.lau@colliers.com Individual Licence : E-141423

Fiona Ngan General Manager | Office Services | Kowloon +852 2822 0751 fiona.ngan@colliers.com Individual Licence : E-197789

billion in annual revenue

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About Colliers International Colliers International is a global leader in commercial real estate services, with over 16,300 professionals operating out of more than 502 offices in 67 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.com

Copyright Š 2015 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.


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