Concrete Analysis | Hong Kong’s Central still the best bet for businesses as vacancy threats diminish

Long-term rental savings have always been, unsurprisingly, a big pull factor for businesses when relocating from one business district to another, including out of Central. This has been tempered by locational boundaries for certain business sectors in a unique market where the right end of Central has been an important location consideration for many banking and finance businesses.

From 2007 through 2010 there were a number of major relocations out of Central. These were driven, in the early part of the cycle, by new supply in International Commerce Centre and One Island East, both providing the specifications and significant rental discount to Central. The decentralisation post the global financial crisis was primarily driven by cost and a wave of new supply in Kowloon East from 2007-2010, totalling 5.2 million square feet that pulled tenants from across Hong Kong Island. This was hot on the heels of Morgan Stanley, Deutsche Bank and Credit Suisse committing to ICC.

At that point in time landlords in Central were facing a relocating client base that did not have a natural replacement, in a poor economic environment. This encouraged significant changes in rental policy that saw rents drop by 35 per cent in 2009, holding off a larger exodus from Central to districts that were not as well connected as they will be when the next cycle begins.

Such moves, or potential moves out of Central, have historically pushed landlords into action to stem the threat of tenant outflow, by offering attractive long term renewal positions. This may not continue to be the case as we enter into the next cycle of new supply from the middle of next year. Less than satisfactory business conditions, the most expensive premium central business district rents globally, close to zero vacancy, continued demand from mainland companies and a booming sales market offer up a different dynamic. One that is likely to lead to another round of decentralisation.

The banking and finance sector has had a couple of false starts when it comes to opening up or re-evaluating alternative districts as suitable ‘front office’ locations. International Commerce Centre attracted three large movers on the pull of significantly lower rents and the push of both expansionary demand and a need to upgrade physical real estate. As spectacular a building as ICC is, the immediate area has not transformed into the district many envisaged, due to infrastructure progress and the significant delay of further commercial sites becoming available.