Savills Prime Office Cost Index Q3 2017 International November 2017 The Savills Prime Office Cost (SPOC) Index presents a quarterly snapshot of occupancy costs for prime office space throughout the world, as TABLE 1. provided by our expert, local tenant representation professionals. Top 10 Prime Markets by Total Cost Total Occupancy Cost Global occupancy cost volatility increased during the third quarter of 2017 Rank City USD / USF as compared to a stable second quarter. Face rent increases drove up 1 Hong Kong $250.96 recorded costs in Paris, Frankfurt, Amsterdam, and Brussels as “post- 2 London (West End) $207.68 Brexit” requirements materialized and leases were executed by occupiers 3 Tokyo $190.17 in these markets. A stronger Euro also helped increase occupancy costs as recorded by our index. 4 Singapore $136.55 5 Paris $133.98 Asian markets were less volatile and showed no discernible uniformity 6 Shanghai $124.15 across the region. Tokyo, Singapore, and Seoul all recorded increases in 7 New York (Midtown) $106.50 occupancy costs as Mumbai and Shanghai recorded decreases. Overall, 8 Seoul $103.07 the impact of exchange rate volatility on recorded occupancy costs for the 9 San Francisco $102.19 region was relatively low as compared to prior quarters. 10 Mumbai $93.86 Across the Americas, a weaker dollar impacted recorded occupancy TABLE 2. expenses in Toronto while the US markets continued to trend in favor of Greatest Percentage Change (Y-O-Y) occupiers with the exception of San Francisco. Rank City Y-O-Y Change 1 Brussels +17.36% In the remainder of this issue, we focus on Hong Kong. The Hong Kong 2 Mexico City -15.30% market has consistently been ranked as the most expensive prime office 3 Amsterdam +9.16% market in the world for occupiers. Given the potential impact this market 4 Paris +8.68% has on our client’s global real estate expense structure, we asked our top 5 Frankfurt +8.65% Hong Kong tenant reps to discuss the market dynamics and explore what the future may hold for global occupiers in “Asia’s World City.” 2 Savills Prime Office Cost Index Q3 2017 VACANCY RATE MAJOR SUBMARKETS Hong Kong MARKET SIZE % Hong Kong Island SQ <4 2 Kowloon Market 124MFT Overview STANDARD LARGE OCCUPIERS LEASE TERM STANDARD LEASE TERM 2-3YR 6-9YR Note: Hong Kong Rent Map Face Rent + Maintenance + Taxes = Headline Occupancy Cost as referenced on page 4 Annual Face Rent (USD/USF) Example: Hong Kong Central – $213.48 (Face Rent) + $17.08 (Maintenance) +$8.54 (Tax) = $239.10 Kai Tak Tunnel NG KO O K LOON B M W A O Y K $83.93 $53.98 West Kowloon Hwy Nathan Rd West Kowloon Corridor Kwun Tong Rd Waterloo RdKOWLOON Kwun Tong Bypass UN TON KOWLOON W G K N S HONG KONG O T East Kowloon Corridor BAY LO AT IO G HO W UN M The Kai Tak Cruise $63.98 INTERNATIONAL O N H K HA S TS AIRPORT IM U Terminal $183.56 S I T $70.50 $87.44 Nathan Rd Canton Rd Cross Harbour Tunnel S TRE S H R IL Western Harbour Crossing O L F Eastern Harbour Crossing $87.22 H PO VICTORIA HARBOUR RT IN O T N Island Eastern Corridor naught Rd West Con $76.15 NG W EU A AN CHA H N MIRAL W I D TY d S Connaught Rd A R k ar RRY B P A A ia U Y $145.36 tor Q $180.61 $128.27 Vic ENTRAL C WA SE Y B $87.20 U A A Y HONG KONG $213.48 C Gloucester Rd $126.73 ISLAND 3 A Conversation with Savills Hong Kong & Tenant Rep Julian Milne Simon Smith Director, Tenant Rep Head of Research & Q A Consultancy Q: How do you see the market Q: How are corporates in HK faring in the What is strata title and how can it impact developing over the next 2-3 years? global war for talent? tenants? HK: There is limited development forecast HK: Hong Kong has very low levels of HK: Strata title enables individual landlords to on Hong Kong Island, so we expect rents on unemployment and attracts professional talent own either whole or part floors within a particular the island to hold if current levels of demand due to its position as a global financial centre building. The system has drawbacks for multi- remain constant. The main office development and its lifestyle benefits. The test within Hong national corporate occupiers: supply is occurring in Kowloon East, which will Kong is often to retain the talent within the • Landlords are often unknown entities, attract some Hong Kong Island tenants and company against competitors. In terms of new inexperienced, or ‘hands off’ managers relieve island markets. talent in emerging industries, Hong Kong has a • Individual floors are more likely to be sold burgeoning entrepreneurial and start-up scene to owner occupiers who will want to take Q: Where are the hotspots in the market that has been recognized by and will benefit back the space at lease expiry for their own and why? from the recent influx of co-working providers in occupation the city. • Expansion/Contraction involving neighboring HK: Quarry Bay continues to provide the most units or other floors can become complicated if attractive decentralized options on Hong Kong Q: Is there a particular submarket dealing with different landlords Island for tenants seeking quality and financially favoured by Millennials? • Upkeep of the building aesthetics and services competitive Grade A space. Swire’s Taikoo will often suffer over the long-term due to the Place portfolio has already demonstrated HK: Millennials have more recently favoured difficulty of achieving consensus amongst its ‘pulling power’ to attract tenants directly the fringe market of Central, in Sheung all owners. from Central, such as Freshfields and Alliance Wan. However, other areas have emerged in Bernstein. Wong Chuk Hang has also emerged Wanchai’s Queen’s Road East area, as well What is “bond connect” and how has it as a new Hong Kong Island sub-market as Cyberport. Accordingly, Sheung Wan has impacted the market? following the completion of the new MTR attracted co-working operators, however the train station and completion of numerous new spread and influx of co-working providers more HK: Bond Connect is a new bond market trading buildings and revitalization projects. generally is likely to also open up new hot spots scheme, using Hong Kong based infrastructure for millennial talent. linked to the mainland, allowing overseas and Q: What key infrastructure / Hong Kong investors to invest and buy debt in redevelopment projects should tenants Q: Which tenants have made the biggest China’s US$9.57 trillion bond market. Previously be aware of? impact in 2017? Why? this was a lengthy process, which limited foreign investors to holding only 1.3% of the market. HK: The Central-Wanchai Bypass underground HK: WeWork, Naked Hub and Spaces have Investment is expected to double over the link with the Island Eastern Corridor scheduled combined to make the biggest impact in 2017, next 5 years. China’s likely future inclusion in to complete in 2018 will improve the travel due to large, multiple acquisitions in a variety of global debt indexes would also ensure more time to Quarry Bay by road. Kowloon East is buildings and across most office submarkets. foreign investment. Bond Connect is the most currently the main area of focus for multiple recent initiative in China’s capital markets to new Grade A office developments and is How is the arrival of co-working / office develop more connectivity with foreign investors, forecast to remain active with the large scale suite providers impacting the market? complementing the recent cross-border share redevelopment of the old Kai Tak airport in to HK: Hong Kong was an early adopter of the co- trading schemes of the Shanghai-Hong Kong its own sub-market as a residential, commercial working trend with many small operators in the Stock Connect in 2014 and Shenzhen-Hong and entertainment district. market. Up until recently, their focus has been Kong Stock Connect in 2016. on small size operations in Grade B buildings. Q: Who are Hong Kong’s major However the recent influx of major providers Have recent political headlines regarding landlords? such as WeWork, Naked Hub and Spaces has Chinese rule made any impact? HK: Cheung Kong, Henderson, Hong Kong seen some interesting developments in the HK: The influence of Chinese authority in Land, Hysan, New World, Sino, Sun Hung, Kai market. Older style Grade B buildings suddenly Hong Kong’s politics is a continued source and Swire Properties. However, the influx of have more relevance and value if they can be of discussion and concern to many in Hong PRC investors has weakened the dominance leased in their entirety and branded by a co- Kong, as was demonstrated by the 2013 of traditional owners, particularly in new, working operator, new developments are seeing protests. However, there have been no major developing sub-markets. multi-floor acquisitions by co-working providers, repercussions despite the recent twentieth and traditional serviced office providers anniversary of the formal establishment of the are starting to feel challenged in their value Hong Kong Special Administrative Region. proposition and identity. 4 Savills Prime Office Cost Index Q3 2017 The SPOC Global Rankings 1 Hong Kong 2 London (West End) 0.0 % – 2 .1 % Quarterly highlights Headline Headline $239.10 $221.55 Occupancy Cost Occupancy Cost n Sentiment in London remains subdued, but the Amortised Cap Ex $23.72 Amortised Cap Ex $12.80 Credit Value of Credit Value of West End submarket just recorded its highest ever ($11.86) ($26.67) Abated Rent Abated Rent quarterly take up.