As China grows its presence on the world stage, companies from the Mainland are testing the waters in the free-market economy of Hong Kong.
Over the last five years, the number of mainland Chinese firms seeking office space in Hong Kong has nearly doubled, and most of these firms are in the financial services sector.
As of 1Q16, Mainland corporates accounted for no less than 40 percent of new lettings in the Central office market in terms of floor area. Whether they’re start-ups or large corporates, all are keen on space in Central, the city’s core business hub. In fact, forecasts suggest that rents in Central will be boosted by 5 to 10 percent in 2016 owing to sustained demand from mainland China, coupled with low vacancy rates.
And while attention was previously focused on the leasing market, in the last six months demand has started to shift towards investment.
Financial might has enabled many of the incoming companies to pay premiums and record high prices for en-bloc purchases, consequently driving yields lower. China Everbright, for example, bought Dah Sing Financial Centre in Wan Chai for HK$ 10 billion in February.
A key driver of rising interest in Hong Kong is its proximity to Mainland China- in terms of both distance and culture, specifically language.
As such, Hong Kong has become a significant first step in China’s strategy of outward expansion, as it offers the exposure firms need before going global, but with an element of safety. Hong Kong also offers the right professional services in its capacity as a regional financial and legal hub.
Favourable policies have also played a pivotal role: many of China’s new policies aimed at liberalisation have given Hong Kong a first mover advantage, subsequently boosting demand from China. The Shanghai-HK Stock Connect and Mutual Funds Recognition Scheme, for example, catalysed the entrance of firms to the Hong Kong market while tangibly boosting leasing demand.
With Mainland corporates playing a vital role in the growth of Hong Kong’s office markets, their presence could do well to incentivise more foreign companies to increase operations in the region.
Rising demand might potentially loosen the strong foothold multinational corporations (MNCs) have in Central- to the extent that some tenants get bumped out.
MNCs may have to seek office space in other districts like Wan Chai and Kowloon East, which offer contemporary, sought after buildings at rents that are around 50 percent lower than those in Central.
With no sign of Mainland demand waning, Hong Kong’s property market faces the risk of growing increasingly dependent on it. While many stakeholders welcome such demand, its critics believe it may be unsustainable. However, given Hong Kong’s competitive advantage, demand is likely to remain stable.
Looking forward: new demand is expected from securities trading and asset management companies while new supply in areas like Kowloon East, dubbed ‘CBD-2’ is laying out cheaper options in an otherwise expensive market.
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