I recently wrote a post comparing life in Hong Kong and Beijing. Having lived in Hong Kong for a few months, I can now make some observations that perhaps scratch beneath the surface of the city’s office and retail property sectors. And since my main frame of reference is still the Beijing market, I will draw comparisons to China’s capital city.

Mainland Chinese financials drive office leasing activity

Mainland Chinese financials have been the most active occupier category in the Hong Kong office market recently, especially in Central where they have been supporting strong rental growth. This is nothing new as mainland banks have been active here for decades and one need only look at the city’s bank notes for evidence. What I do find interesting however is that mainland financials are the key occupier category in the two most expensive Asia Pacific office markets, Hong Kong Central and Beijing Finance Street. Both are also amongst the world’s most expensive office markets globally.

I understand why Finance Street rents are high. A rental subsidy, designed to foster the development of a financial district in Beijing, has contributed to high rents. Qualifying financial institutions receive a tax rebate equivalent to one third of their rent. Landlords have taken advantage of the subsidy, the need for many financials (both foreign and domestic) to be close to regulatory bodies in Finance Street and tight vacancy to raise rents. I am told there are no such policies in Hong Kong and the drive to locate in a city with one of the world’s largest agglomerations of financial institutions underpins demand.

Retail markets changing shape

The Hong Kong and Beijing retail markets feel completely different. Here in Hong Kong, high street shops mix with towering vertical shopping centres in areas like Causeway Bay, and the different retail environments are quite interconnected and complement one another. Some of you may disagree but there really isn’t an equivalent in Beijing, although you could make a weak case for Wangfujing or Sanlitun. I have heard some analysts describe Beijing shopping centres as islands, separated by vast oceans. It certainly feels that way as a shopper when it may take 20 minutes or more to travel (by car, not boat!) between Beijing’s key shopping centres.

Some landlords in both markets face challenges over the near term. Fewer mainland tourists are visiting Hong Kong and retail sales are shrinking as a result, and hence many retailers’ margins and affordability are also shrinking. In the centre of Beijing, landlords face increasing competition from suburban projects which are bringing better shopping experiences closer to residential areas.

There are other commercial sectors in Hong Kong I aim to explore soon, most notably the logistics warehouse sector which I have heard is vertical – yet another effect of the relative scarcity of land for development here. I look forward to sharing my thoughts with you in my next post, but until then visit the JLL Research Portal where you can find more in depth analysis on Asia Pacific markets.

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