Rents in Hong Kong are high by global standards. Grade-A office rents in Central, for example, are the highest in the world and, by some estimates, more than 50 percent higher than in New York Midtown. The lack of space, especially in our central business district, contributes to a long-term undersupply. But the fact that such rents remain at a high level for years also demonstrates the underlying strength of Hong Kong as a financial and business center.
Over a cycle, the price of a real estate asset is driven by the rent commanded by the asset. And rent, especially for commercial properties, is determined by the value the tenant creates by using the space. The value generated by a company’s headquarters or regional office is sometimes hard to quantify even as Hong Kong faces competition from other cities in the region.
Thousands of local, mainland, and foreign companies maintain a significant presence in Hong Kong. Maintaining an office in Hong Kong can be very expensive. On top of high rent, Hong Kong staff cost is also high when compared to other business centers in the region. Thus, their vote of confidence on our legal structure, available talent, and connections with the rest of the region should not be underestimated.
The math for retail tenants is much more direct as retail shops directly generate sales revenue. One metric we often used when tracking the performance of a mall is the occupancy cost, or the percentage of retail revenue spent as rent. An occupancy cost of 10 percent means that for every $100 a retailer makes, $10 goes to rent.
Tracking occupancy cost is useful because it sheds light on possible rental movements. While most people understand that retail sales growth will prompt rental increases, the occupancy cost will help indicate if a particular spot is over- or under-rented. The amount of retail growth is also different from mall to mall. Retailers would sometimes be willing to bid a higher rent for a desirable space, and this will be reflected in the higher occupancy cost.
That’s why the long-term prospect of real estate inevitably ties in with the business prospects of an area. Two decades ago, locals have often described Hong Kong as a “single-layer copper pot” because even a small news development could trigger could trigger a rise or fall in the financial markets. But the Hong Kong system has continued to develop over the last 20 years.
When Time magazine first used the term “Nylonkong” in 2008, Hong Kong was a laggard compared to New York and London as a financial center. The Global Financial Center Index 3, published in March 2008, gave Hong Kong a score of 695, versus London’s 795 and New York’s 786. The latest index, published in March 2019, rated Hong Kong 783, versus London’s 787 and New York’s 794. But even though Hong Kong ranked third in both surveys, the city has deepened its financial markets over the last 11 years.
A metropolis like Hong Kong can withstand some shocks. Our stock market, for example, has remained largely stable over the past seven weeks.
Nonetheless, the business sector believes that a resolution of the current crisis is important for Hong Kong to maintain its status as a financial center, as reflected in the multiple statements and open letters by business leaders and the General Chambers of Commerce.
Our leaders should realize that further delays in the government’s responses will only worsen the situation and prolong the time for divisions in our community to heal.
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