Stock Connect To Have Massive Impact on Hong Kong Office Sector
Stock Connect To Have Massive Impact on Hong Kong Office Sector
May 6, 2015
China’s offshore capital markets are currently small, but once the Stock Connect really takes off, they could grow to USD4.4tn — larger than the size of Hong Kong’s capital markets today
Chinese banks and financial institutions are increasingly looking beyond the domestic market and have ample scope to expand their footprints in Hong Kong
But only 1.9m sq. ft. (NFA) per year of new Grade-A office supply will be available over the next 5 years in Hong Kong
May 6, 2015, Hong Kong – Commercial real estate services firm CBRE and Asia-based investment bank Daiwa Capital Markets today launch a unique collaboration in the form of a major research report addressing the impact of Hong Kong-Shanghai Stock Connect Scheme and the growing intensity of China’s financial markets in Hong Kong, and the massive implications of this for Hong Kong’s office sector.
The Stock Connect signifies innovation in the financial institutional frameworks of Hong Kong and China, and a gateway for China to seamlessly connect with the world. It also marks the creation of an offshore capital market for China that could lead to trading in all of China’s capital markets taking place on a large scale in Hong Kong. With the Hong Kong property market inextricably linked to its economic and financial sector, the potential impact of the Stock Connect on Hong Kong’s Grade-A office market is colossal.
The Integration of China
The Stock Connect is the first step in the establishment of what Hong Kong Exchanges and Clearing refers to as the “Mutual Market” of Hong Kong and China, implying the gradual integration of China into the global economy. It will have an important bearing on structural developments in Hong Kong – China capital markets, which will, in turn, have implications for the development of securities, fixed income, asset management, research, and financial products.
Jonas Kan, Head of Hong Kong and China Property Research at Daiwa Capital Markets, commented on how the long-term implications of the Stock Connect cannot be underestimated. “If only because of the sheer size of China’s M2 and bank deposits, the Stock Connect has the potential to allow China to evolve from its historical role as a capital importer, into an important capital exporter. It could allow Hong Kong to participate in the reallocation of the USD18tn-plus capital now sitting on the balance sheets of the Chinese banks.”
The Stock Connect will support the expansion of Hong Kong’s financial sector and will give impetus to the city’s Grade-A office market. “Hong Kong could eventually provide a bridge between China’s otherwise incompatible financial institutional structure and the rest of the world,” said Kan. “The future is likely to see other policies introduced, promoting a high level of financial sector activity. This huge increase in activity will require office space.”
The New Driving Force for the Hong Kong Office Market
The Stock Connect will reinforce Hong Kong’s role as one of Asia’s most mature financial and professional services hubs and the next five years will see an increased demand for fund raising, stock trading, wealth management and other professional services.
In addition to increased real estate requirements stemming from the organic growth of established enterprises, Hong Kong office landlords will enjoy sustained demand for space from Chinese financial sector companies, and international companies seeking to establish a presence in Hong Kong due to enhanced access to China’s capital markets.
Marcos Chan, Head of Research at CBRE Hong Kong, Macau and Taiwan, said, “The banking and finance sector is now the largest occupier group, leasing around 24% or 15m sq. ft. NFA of Grade-A office space across Hong Kong. Mainland China finance companies are now becoming increasingly active in seeking office space in Hong Kong.”
“In mid-2014, 19% of Grade-A office floor space (c2.6m sq. ft. NFA) in the top 25 Grade-A office buildings in Greater Central was occupied by mainland Chinese companies. This compares to 12% (c1.6m sq. ft. NFA) in 2008. From 2008-2014, occupancy by European firms in Greater Central contracted from 3.9m sq. ft. NFA to 3.0m sq. ft. NFA, with some firms downsizing and others relocating to decentralized locations.”
CBRE estimates that at least half of the Chinese firms in Central are now banking and finance sector related. The future will likely see more financial sector firms from China expanding into Hong Kong, and its footprint is expected to grow to circa 23% in 2-3 years.
How Will Hong Kong Fulfil Extra Demand?
The present lack of appropriate space available for development in established core office clusters in Hong Kong poses a challenge for future growth of the corporate sector, as well as keeping up with tenants’ ever-growing demand for better quality building. Some office demand will have to be met in emerging districts.
“The years ahead will see large occupiers gradually increase their office footprints in decentralized submarkets,” said Chan, “while new entrants from mainland China and overseas will fill some of the vacated space in the CBD. This should ensure a good demand supply balance is maintained in core districts, ensuring stable vacancy levels and forming a sound platform for long-term rental growth.”
Regardless of the emergence of new office projects in decentralized areas there is an urgent need for more cost-effective and high-specification office space in Hong Kong. The short-to-medium term new supply of such space is limited both in core and decentralized locations and the corporate sector is also unclear about the timeline of the city’s longer-term office supply.
“To maintain Hong Kong’s long-term competitiveness in terms of occupancy costs and office space availability, the Hong Kong Government must (1) fast track the auctions / tenders of designated commercial sites in Central and around the Kai Tak development area; (2) speed up the construction of infrastructure projects connecting Kowloon East with the established CBDs; and (3) enhance the transparency of the city’s supply of commercial land,” concluded Chan.
Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.