(18 September 2018, Hong Kong) The Government currently only has enough land to deliver about 10 years of commercial office supply, according to JLL’s latest Commercial Land Supply research report. Hong Kong’s Grade A office vacancy rate has steadily trended lower over the last 20 years, contributing to the city being the most expensive office market in Asia Pacific. 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.
L to R – Denis Ma, Joseph Tsang, Alex Barnes
Joseph Tsang, Managing Director at JLL, said: “Discussions around government land supply has focused on housing over the last few years. 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. The Government needs to ramp up land supply for commercial office development if it is to ensure that Hong Kong continues to have room for businesses to grow and be competitive.”
JLL has identified 20.1 million sq ft of potential office space that could be delivered from future Government land sales. Assuming demand remains in line with historical trends of 2 million sq ft per year over the past 30-years, this will only provide enough space for 10 years. The majority of that space is in Kowloon (14.7 million sq ft), whereas just 5.4 million sq ft could be delivered on Hong Kong Island.
Tightening office supply is a major concern for the city’s office market as vacancy in the Grade A office market has steadily declined over the past 20 years. The vacancy rate for the entire Grade A office market has fallen from 11.9% at the start of 1999 to just 4.2% at the end of August, while the vacancy rate in four of the city’s major office submarkets has fallen below 2%–1.5% in Central, 1.6% in Wanchai/Causeway Bay, 1.4% in Tsimshatsui and 1.6% in Hong Kong East.
The current situation is largely a result of office supply failing to keep up with demand over the last 20 years. Over this period, Grade A office stock has grown by just 1.3 million sq ft per year, but net absorption has averaged just over 1.5 million sq ft per year, a shortfall of about 200,000 sq ft per year.
The low vacancy rate environment has contributed to rents to rise significantly. Grade A office rents have increased by an average of about 6.5% per year over the past three years, while rents in Central have grown by 9.5% per year. This has made Hong Kong the most expensive office market in Asia Pacific for occupiers. As at the end of 2Q18, total occupancy costs for Grade A office occupiers was 21% and 54% higher than that in Tokyo and Singapore, respectively. This significant rental differential (Figure 1) brings into question whether large multinational companies are as willing to grow their headcount in Hong Kong compared with these other cities.
Figure1: Rental Comparison across Asia Pacific
According to Forbes Magazine, 46% of multinational corporations have set up their Asian headquarters in Singapore, with Hong Kong coming in second at 37%. The trend is more profound when considering tech companies with Singapore at 59% and Hong Kong at just 18%.
Figures (Figure 2) from JLL show that new office supply in Shanghai, Tokyo, Sydney and Singapore over the past 10 years was also higher than Hong Kong. The outlook for the next five years is similar, with Hong Kong likely to deliver less space than these markets. JLL expects about 10 million sq ft of office space will be delivered across Hong Kong between 2018 and 2022. This forecast supply would generally be enough to cater for future office demand, assuming historical net absorption per year. However, the leasing market may tighten further as at least two office buildings will be demolished for redevelopment over the next four years and structural changes in the office market that may see demand increase more than expected.
Figure 2: Supply Comparison across Asia Pacific
Denis Ma, Head of Research at JLL, said: “Another concern is that the supply of Grade A office space in Hong Kong in recent years has become increasing reliant on land sold by the Government, rather than redevelopments of privately held land (Figure 3). From 2008-2017, just over 30% of the supply delivered to the market was from Government land sales. However, Government land sales are forecast to account for over 60% of Grade A office supply between 2018 and 2022. At present, all Grade A offices set for completion in 2022 are derived from Government land sales. This highlights the important role that the Government has in ensuring that appropriate business accommodation is delivered to the market,”
“The lack of a steady supply of land results in fluctuations of new office space being built such as in 2020, when just 240,000 sq ft will be delivered. The Government should be targeting land sales that can deliver a certain level of office space every year,” he added.
Figure 3: Hong Kong office supply by development type
Alex Barnes, Head of Markets at JLL, said: “Hong Kong will lose its competitive edge as the barrier to entry for companies looking to enter or grow specific parts of their business, particularly Technology Research and Development will be stifled, in part, by high rent and little office space availability compared to alternatives. Clearly Hong Kong is a long way behind Singapore in its volume of technology industry by size and nature. We can’t catch up on volume of business growth, but we should at least be in the game for the sake of Hong Kong’s future as a leading world city.”
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