This article originally appeared in HongKongEcho 84 - REAL ESTATE: The price to pay
In Hong Kong, the rise of rents is unrelenting. As a result, ‘new’, more affordable districts are popping up, shifting the focus away from Central. Nigel Smith, Managing Director of Colliers International Hong Kong, spoke to us about how the Southern District of Hong Kong Island is leading the charge.
Eleven hours into its first day of operation (28 December) and there had already been more than 92,000 passenger journeys on the South Island MTR line. The mania that characterised the opening day of the city’s first new MTR line in more than a decade may have raised some eyebrows, but its significance was clear. The north and south of Hong Kong Island had been, finally, stitched together.
The construction of this new arterial thoroughfare represents one more piece of the puzzle for businesses and individuals finding themselves squeezed out of the city’s traditional hubs through ever-increasing rents. “We’ve seen multinational corporations (MNCs) across the board look at operational efficiencies; be it through headcount, reducing their real estate footprint or new ways of working. And as companies inevitably look around [at other districts], the first thing they’re going to consider is infrastructure,” explains Nigel Smith, Managing Director of Colliers International Hong Kong.
The low-rent sanctuary of the Southern District ‘triangle’ of Aberdeen, Wong Chuk Hang and Ap Lei Chau, just got its shot of adrenaline.
It’s a process that has long characterised the way Hong Kong’s business districts have developed. “I’ve been [in Hong Kong] for 27 years; when you look back at the pattern, there’s always these ‘shifting sands’. Rents go up, perhaps due to a lack of supply, and companies tend to move due to cost but also to expand. Then when there’s new supply, rents go down and there’s a change of guard,” he adds.
Drawing on his British roots, Nigel makes the comparison with Canary Wharf and the various elements that drove companies to move to what is now a major financial district in East London. The first element was floorplates; a question of quality and size of the building. The second was deliverability; the ability for landlords to deliver on promises. The third was infrastructure; getting in and out. The final two: visibility (of the building) and cost.
Previously, the Southern District ticked only a few of these boxes. As a result of the quality of building and floor plate size, insurance companies, consumer goods distributors and media organisations represented the typical profile of company to have been heading south.
Now, the profile may shift. “There simply wasn’t the quality of building [before]. But as the landlords started to anticipate the MTR heading there, of course they start to build [the right quality],” he says.
Ultimately though, moving office is now more a question of people. “We’re in a high rent environment. So, what do you do? You need to think about the needs of your staff,” reasons Nigel.
In a recent transaction with a major MNC, he explains how the organisation took a close look at where their staff lived to evaluate potential office locations, analysing the quickest commute times for the highest percentage of people.
But beyond pure numbers, you also have to think about facilities. “Inevitably if you’re standing up as a Managing Director to tell your staff that you’re moving to Wong Chuk Hang, they’ll all be thinking about their bellies. As Napoleon said, ‘an army marches on its stomach’”.
There’s no escaping the fact that when you get off at Wong Chuk Hang station, you feel closer to being on a factory floor than in a bustling business hub. An unmarked doorway leading to a tiny industrial elevator doesn’t hold quite the same grandeur, even if the F&B outlet on the 20th floor is just as good as something you’d find downtown.
The F&B makeup and general ‘feel’ of the district will surely change because “the demand is there,” explains Nigel. “I was waiting for a meeting [in the area] and nearly everyone seemed to walk past with a famous coffee brand cup. It’s no surprise [those brands] are down there. And yes, people will complain that there are limited options, but actually up at the MTR station there will be a lot of options and more will come.”
New districts on the rise
New F&B outlets are only part of the “natural transformation”, as Nigel puts it, of the district which is already taking shape – from dormant industrial outpost to office and residential hub.
Ambitious developers are the other, more volatile, part of the transformation. The recent government commercial site sold in Wong Chuk Hang reached a healthy HK$2.53 billion. Extrapolating forward the rents they would need to charge to make a profit, one could estimate prices hitting mid-HK$30 per sq ft when the market is currently at mid-HK$20 per sq ft in the area.
“Developers must believe that there’s a natural demand behind the supply and that will, ultimately, reaffirm the area’s importance,” he says, “So we can start to see, perhaps, a j-curve in rents over the next five years as the area becomes more desirable”.
It’s a trend that we could see in a number of decentralised areas. After all, Central’s astronomical rents leaves room for growth elsewhere. “If you look at the falloff rate [of office rents] by distance, it’s the highest in the world. It’s literally 50% [falloff] within a five minute taxi ride from Central. I’m talking from Two IFC to Wan Chai. If you look at the West End of London, which is probably a similar distance, the rents remain virtually the same,” muses Nigel.
What it takes is a change of mind-set. In a hyper-connected city, people can be quick to dismiss a location if it’s more than a handful of stops away by MTR. “If the change of mind-set occurs, then these new decentralised areas will suddenly flourish.”
Daniel Shih, Director of Research at Colliers International Hong Kong, gives us the lowdown on the facts and figures concerning the South Island
“The future supply plus the current Grade A office stock for Wong Chuk Hang will be close to 3.3 million sq ft total. We don’t see much more new supply after the latest commercial land sales, unless there’s redevelopment of old industrial buildings being converted into offices.”
Comparison with Kowloon East
“Based on current supply, for the next few years Kowloon East could go up to more than 15 million sq ft – roughly five times that of Wong Chuk Hang. So the quantum will be very diff between the two areas.”
“Right now, Wong Chuk Hang is getting closer to Kowloon East for rents, particularly after the MTR line finally declared its opening day. With the expectation of new MTR services, the vacancy rate dropped more than 10% in the last 12 months to mid-20s at the beginning of this year. With an increasing net take up of office space, Wong Chuk Hang could easily fill up quite soon as it has very limited supply.
Prices will get closer to North Point and Quarry Bay – so that will give the area room for 20-30% growth for the next two to three years.”
“The latest transactions indicate that PRC developers are mostly interested in residential sites. They’re being very aggressive on the land bidding price; in Chinese we talk about the ‘flour being more expensive than the bread!’”
The latest development at Marina South on Ap Lei Chau is now selling at roughly HK$30,000 per sq ft. By the time the next [upcoming] development is pushed to the primary market in 2-3 years, prices could be above HK$40,000 per sq ft.”
Lee Nam Road
Hong Kong’s most expensive lump-sum sale to date.
Price: HK$16.86 billion or HK$22,118 per sq ft
Type: Residential land plot
Buyer: Logan Property Holdings (Shenzhen) and KWG Property Holding (Guangzhou)
Wong Chuk Hang Station
Premium: HK$4.68 billion or HK$8,119 per sq ft
Type: MTR residential project
Buyer: Pingan Real Estate Capital (Hong Kong – subsidiary of Shenzhen-based Ping An Real Estate Co Ltd) and Road King Infrastructure (Hong Kong)