OFFICE MARKET
INSIGHTSJULY 2019
Will Kowloon see a Central2 after CBD2?
West Kowloon Terminal Site to Act as a Catalyst West Kowloon Terminal Site Kowloon has always been considered the lower-cost alternative for office space compared to Hong Kong Island, with average rents 30-50% lower than those across the harbour. The area has also been largely avoided by the banking & finance and Kowloon's professional services sectors. However, in the last few years, the Government has future begun shifting commercial activities to the Kowloon side with its CBD2 concept, spurring great change in the area. developement to be Central2 Apart from the CBD2 concept, the hottest topic for Kowloon’s future development is now a newer concept known as “Central2” – whereby people are expecting the commercial site atop the West Kowloon Express Rail terminal to convert Kowloon’s core district Tsim Sha Tsui (TST) into the second Central of Hong Kong.
This commercial site is not only the largest of the 2019-2020 land sale programme, but also the largest of its kind in recent decades. With area of approximately 5.96 hectare, the site will be home to three office towers providing up to 3.21 million sq ft, land SALE Largest with 2.8 million of office space, making it bigger than the International Financial Centre Commercial complex (2 million sq ft) and of similar size to the nearby International Commercial Centre (2.3 million sq ft). site for sale in 2019-20
Projected to be the first land sale $100 in Hong Kong to surpass BILLION HK$100 billion
million sq ft 2.8 office space Rent Potential in Kowloon FIGURE 1 Vacancy and Occupancy Change in K11 Atelier Breaking free of its traditional low-rent profile, in recent years Kowloon has seen more than one ’000 sq ft Vacancy Leased Area building achieve gross rent of over HK$100 per 450 sq ft. One such example is the newly completed 400 K11 Atelier, with gross average office rent of over 350 HK$100 per sq ft. Considering that the building’s 300 roughly 75% efficiency rate, this figure converts to 250 HK$133 per sq ft. Most notably, a recent lease in the 200 building of roughly 3,000 sq ft gross was signed for 150 up to HK$118 per sq ft gross, equivalent to HK$157 100 per sq ft net, an all-time record for Kowloon office 50 transactions. 0 7 7 7 7 7 7 7 7 7 7 7 7 9 9 9 9 9 9 6 6 6 8 8 8 8 8 8 8 8 8 8 8 8 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------l t r r l t y t r r v r r y y c n n v v g n n c b p c n n g b b p u c u p a c c a o p a p a u a o a o a e e e u u u a e a e e e e Since Mizuho Bank took residence in October u J J A O J A A J F J O O J M N J J A D S F F M M N M N D A D S M 2016, the building has continued to receive a M good response from the market, seeing an Source: Knight Frank Research average absorption rate of about 9.8% per month (see figure 1). This reflects the strong potential for This suggests that the Kowloon market is transforming from “lower cost” premium Grade-A office buildings in Kowloon. to “strategic location and quality”. Given average premium Grade-A building rent of roughly HK$150 per sq ft net, then assuming 3% inflation Meanwhile, International Commerce Centre is also per year between now and 2025, when the West Kowloon terminal seeing an average of roughly HK$100 per sq ft commercial site is expected to be completed, plus say a 5% premium gross. Considering the building’s efficiency rate of for new-building quality, then net rent of up to HK$190 is certainly about 70%, this translates to HK$143 per sq ft net. achievable in Kowloon. Further, by then Kowloon will have seen several The building currently has less than 1% vacancy more buildings with net rent reaching up to the level of Hong Kong and is another good example of the area’s premium Island’s Grade-A and premium Grade-A market. Grade-A office absorption.
Tenant Mix Trend in FIGURE 2 Kowloon also Changing Tenant Mix Distribution in 2016-17 Apparel & Accessories To date, the Banking & Finance industry, one of Sourcing 4.95% the highest-budget tenant sectors in the market, 6.76% Banking & Finance has located only back up operations in Kowloon. Others 26.58% However, this is changing as we see more and 7.66% more companies relocating their Hong Kong Beauty & Fitness Island front office to Kowloon. 7.66%
The CBD2 area is now home to Citibank and
JPMorgan’s front offices, a result of large-scale Electronics & IT&T Medical Care consolidation in the companies’ respective long- 8.56% 13.51% term real estate strategies. In the TST area, we Insurance are also seeing more and more Japanese and Prof. Services 11.26% 13.06% Taiwanese banks, whom have long been present in the area and are now expanding and consolidating further with their front line offices. FIGURE 3 This pattern continues to progress. In 2016, Tenant Mix Distribution in 2018-19 banking and finance accounted for just 26.58% Sourcing Co-Working of major occupiers in the central part of Kowloon, 5.68% 4.55% a figure that rose to 35.23% in 2018 and elevated Others banking and finance to a fast-developing sector 5.68% among major occupiers in the TST area. Banking & Finance Apparel & Accessories 35.23% 5.68%
Prof. Services 6.82%
Insurance 9.09% Medical Care Beauty & Fotness 17.05% 10.23% Short & Long Term Differences The West Kowloon terminal site will likely be the first in Hong Kong history to surpass HK$100 billion land price, assuming a mid-range figure of up to HK$30,000 per sq ft. Adding an estimated HK$100 billion in development costs, the total consideration of the parcel could reach as much as HK$200 billion. The huge potential impact of the project leaves us very optimistic that it will catalyze the whole of Kowloon into a new commercial hub – a “Central2” formation, in addition to the CBD2 concept. In fact, if net rent can reach up to HK$190 per sq ft, as deduced above, then over HK$200 billion the mature yield is still over 3.5% - a very reasonable return compared to today’s investment vehicles. The biggest limitation is the huge amount of capital involved that will likely push developers to form conglomerates or joint ventures through which to bid and run.
Kowloon’s short-term prospects, however, are not as optimistic as those of the long-term, particularly given the limited stimulus as well as economic and political concerns.
Market Outlook Our housing forecasts for the second half of 2019 remain rather conservative at a 1-3% rental increase, despite our highly optimistic long-term view of a maturing West Kowloon.
The recent forfeiture of deposit by Goldin Group on the awarded Kai Tak commercial site has revealed the shaken confidence of some developers in the short- to mid-run amid looming political and economic uncertainty. There are still more adjustments coming in the Kowloon market before a new upward trend is expected to develop based on the “Central2” concept becoming more widely recognised and accepted.
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