Date
23 March 2017
Hong Kong has good reason to support the development of alternative nodes in its office property market.
Hong Kong has good reason to support the development of alternative nodes in its office property market.

HK office sector: Will we see more alternative nodes?

Hong Kong’s office market has continued to diversify in recent years, and the recent auction of a Grade A office plot in King Lam Street, Cheung Sha Wan, is the latest example of high-quality space being planned outside of the traditional central business district. In fact, in the last fifteen years, we have seen Island East, Kowloon East, and Kowloon West all gaining momentum as newer office nodes. The development of these newer nodes should be positive for the overall Hong Kong economy.

The geographical constraint of our traditional Central Business District is the most obvious reason for developing alternative nodes. Central is bordered by a harbor in the north and hills to the south, meaning that it can only expand through gentrifying neighboring districts. This process started with the commercial development of the areas around the Admiralty station. High-end assets, such as Pacific Place, have helped Admiralty become part of the Central Business District.

After the Admiralty conversion, Sheung Wan and Wan Chai have become the next targets, but the progress there has been relatively moderate. These districts traditionally have stronger identities and their own economic activities. Hence, redevelopment often becomes a lengthy process. It is heartening to see speedier development along Queen’s Road East in the last five years, but there is a limit to how quickly the two districts can be incorporated into the main central business district.

Forming alternative nodes was a faster way to introduce supply to Hong Kong. Hong Kong’s transportation network, in particular its subway system, has allowed the alternative nodes to develop, complementing existing supply. This is especially true for Kowloon West, where the direct subway line into Central has allowed access from its only major office development. The current plans of that district include additional office space, and we expect that after the district has been fully developed, the area around Kowloon station will be seen as part of the CBD because of the subway access.

A second factor favoring the development of alternative nodes is that the Hong Kong economy itself has been diversifying. Island East, for example, housed many luxury brands and their supporting industries, such as retail consultancies and advertising agencies. Since the Science Park became operational in 2004, high tech firms have gradually expanded their presence in Sha Tin and have formed mini nodes near the Fo Tan and Shek Mun train stations. These office nodes also promote economic activities around the area.

Island East, for example, has developed retail and food offerings that cater to European tastes, mainly as a result of the concentration of French and other European expatriates in the district. Fo Tan and Shek Mun are also seeing more supporting services, as their major space users gradually became white collar, IT professionals instead of the more traditional blue collar staff.

When executed correctly, these development plans can create a positive feedback loop. As the office tenants stimulate demand for better services, the better services attract more office tenants, which create even more demand. One rule of thumb is that 5 million square feet, or about 50 mid-size office buildings, is needed for an office node to become sustainable, because this is typically the size needed for the district to hire enough professionals to reach a critical mass. This leads to a networking effect and part of the allure of the district will then be being close to other fellow professionals.

A single, million square-foot development in Cheung Sha Wan may not transform the district on its own. However, there are also several more office and high-end industrial developments in the area, which can help the district to develop in the years ahead.

– Contact us at english@hkej.com

RC

Chief Investment Officer, Admiral Investment Ltd.

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