The glittering office towers of Hong Kong’s Central district have long been the bastion of big global banks. However, the banking and financial services sector is facing a number of challenges globally: sluggish economic growth, ultra-low interest rates and increased compliance and regulatory costs are all undermining profit margins. At the local level, the growing presence of mainland Chinese financial institutions is reshaping the banking and financial services sector, previously dominated by U.S. and European bulge bracket investment banks.

Despite the challenging business environment, JLL believes there is still room for growth within the sector. According to our most recent report titled “New Financial Sector Dynamics Re-shape Hong Kong’s Office Market”, the sector is likely to add a further 55,000 employees over the next 10 years, which could potentially translate into an additional 5 million square feet of office space demand.

As larger western banks and financial institutions downsize or move out from Central—the city’s CBD—against rising rentals, much of the vacated space is likely to be reabsorbed by mainland Chinese corporates. Given that the initial requirement from these companies is usually less than 5,000 square feet, we expect the occupier market in Central to become more fragmented, presenting challenges for both tenants and landlords over the long-term.

Figure 1: Average office leasing requirements from PRC and
Non-PRC financial institutions between 2011 and 3Q16
Source: JLL

For tenants, a more fragmented market limits options, making it more challenging for them to secure space for expansion, especially those looking to do so in their current location. With a large number of mainland Chinese corporates snapping up office buildings and upcoming developments for their own use, the availability of high quality, modern stock on the leasing market may be further reduced. In addition, tenants may need to absorb higher rentals on a unit basis given smaller lump sum rents.

For landlords, having more small occupiers may generate higher rental income especially as mainland Chinese financial institutions are more willing to pay a premium to secure office space. On the flip side, landlords may find it more difficult to find replacements should there be an economic downturn that leads to the shutdown of businesses. Moreover, landlords will likely have to allocate more resources to manage a higher number of tenancies, conduct pre-leasing due diligence as well as implement a more comprehensive leasing strategy to maintain high occupancy.

While Central is unlikely to lose its mantle as the city’s crème de la crème any time soon, what we can expect in the future is a more fragmented tenant base that will be increasingly underpinned by mainland Chinese tenants. How fragmented the market becomes will depend on how landlords respond to the current changes in the city’s banking and financial services sector.

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