Redrawing Hong Kong’s CBD2 boundaries

December 15, 2017 / By  

In the 2011 Policy Address, Donald Tsang, the then-Chief Executive announced his “Energising Kowloon East” initiative to promote the development of the former Kai Tak Airport, Kwun Tong and Kowloon Bay business areas — collectively referred to as Kowloon East — into a second CBD for the city.

Since then, Kowloon East has added about 3.8 million square feet of Grade A offices and is now the second largest office submarket in the city. With a wave of government land sales and improving infrastructure on the horizon, the future looks bright.

The uniqueness of Kowloon East

Although treated as a single office submarket, Kowloon East is anything but homogenous. The submarket covers an area of 74.4 million square feet, which is only slightly less than the 81.7 million square feet covered by the three major office submarkets on Hong Kong island; Central, Wanchai/Causeway Bay and Hong Kong East.

The three major areas that make up the Kowloon East submarket have very distinct characteristics that attract a broad range of different occupiers. Looking ahead, we believe that the Kowloon East will splinter into at least two distinct submarkets: Kai Tak and Kowloon Bay/Kwun Tong.

Kai Tak likely to emerge as the leading office location

Kai Tak is likely to emerge as the leading office location in Kowloon East due to the large amount of government land available for development and proximity to the future Shatin-to-Central Link, a new subway line that will reduce travel time to Central to just 15 minutes.

At present, there are no rental benchmarks in Kai Tak as there are no commercial Grade A offices in the area. But using the latest government land sale result in the area as a guide, it appears that developers are pricing future office rents in Kai Tak at around HKD 70 (USD9) per sq ft per month, on a NFA basis[1].

This is more than double the amount currently achieved in Kwun Tong and Kowloon Bay. Kai Tak’s rental premium is further evidenced from the recent sale of 8 Bay East in Kwun Tong where a three per cent yield on the purchase price equates to a monthly rent of about HKD 50 (USD6) per square foot, on a NFA basis.

Outside of Kai Tak, developers are also trying to push the development of a ‘Financial Corridor’ along the section of Hoi Bun Road nearest to Ngau Tau Kok MTR station. The new buildings built in the area are already drawing plenty of interest from the big financial institutions, with Citibank and JPMorgan the most notable banks committing to the area.

Kowloon East still has plenty of room to grow and will likely be treated as a single submarket over the near term. However, as it develops and matures, we expect the occupier and rental markets to become more fragmented, which will inevitably lead to the submarket boundaries being redrawn.

[1] In May, Nan Fung Development acquired a mixed-use development site for HKD 24.6 billion (AV HKD 12,864 per sq ft). Assuming a Gross Development Value of about HKD 20,000 per sq ft for the site and 3% yield, monthly office rents would need to be set close to HKD 70 per sq ft, on NFA basis.

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