GBA Outline Development Plan to benefit Hong Kong’s office sector

An integrated Greater Bay Area (GBA) has the potential to shape and accelerate the development of real estate markets across the region. Now, thanks to the recent release of the Chinese government’s long-awaited Greater Bay Area Outline Development Plan, we have further guidance about how this future development might play out. 

Broadly speaking, the vision for the GBA is to further integrate the nine largest cities in Guangdong Province with Hong Kong and Macau to establish an economic bloc with a diverse industry mix. The removal of barriers that limit the movement of trade, capital, information, and people—coupled with targeted government policy—will allow various industries to flourish. Although specific details of the implementation of the plan have been patchy thus far, the latest outline has provided some clarity on the range of policies that will likely be pursued. 

For Hong Kong, the plan is to build on the city’s role as the key regional financial hub and for it to continue to act as a conduit between international capital markets, the GBA, and the rest of China. It will remain a hub for professional services, transportation, trade, and aviation. The plan specifically identifies the city as a legal and dispute resolution centre for the Asia-Pacific region and highlights the part it will play in the roll-out of the Belt and Road Initiative (BRI).

A broader economy will naturally provide plenty of opportunities for businesses to grow. Hong Kong’s financial and professional services sectors stand to directly benefit from the government’s plans to widen market access whilst promulgating supply-side structural economic reforms. In turn, this will directly translate into stronger demand for office space: Mainland Chinese (PRC) firms should continue to grow as they look to expand globally, while non-PRC firms can benefit from the improved market access that the GBA will bring.

With an increasing number of companies from the financial, insurance, real estate, and business services sectors—more commonly referred to as FIREBS—moving their offices into areas beyond the city’s traditional Central Business District, decentralised office markets such as Hong Kong East, Kowloon East, and Wong Chuk Hang, are likely to benefit most from this growing share of the business pie. 

The growth of the FIREBS sector will also help lift rentals in these decentralised office markets. Our analysis of leasing transactions shows that tenants from the financial, insurance, and real estate sectors typically pay above market rent, regardless of location. In Hong Kong East, for example, legal firms that were previously paying close to HKD 100 per sq. ft. per month in Central are now renting offices at closer to HKD 60 per sq. ft. per month. All things being equal, this would suggest that there is significant scope for rentals to climb higher, which would help justify the lofty prices being paid for offices in these locations.

Though the number of persons employed in FIREBS in Central has fallen slightly from a high of 164,710 in 2008 to 161,280 in 2018, there is still plenty of demand for the real estate they have left behind. The opening of more cross-border investment channels and the Chinese government’s commitment to promoting its BRI policy will continue to drive long-term demand for office space from PRC corporates as they seek to expand their business beyond their domestic market. In this regard, the trend of PRC corporates establishing and leveraging on the prestige of a Central office address is likely to continue. 

Central isn’t the only office location on their radar, however. Demand from PRC corporates that spreads beyond Central may be further accelerated by the lack of space in the CBD and the arrival of companies from outside banking and financial services, the industry sector that has been most active in recent years. In the past 18 months, we’ve already seen a greater number of PRC firms relocate or open offices on the fringes of Central, around Admiralty and into Wanchai, as they seek room to grow. Moreover, the opening of the new Express Rail Link has led to an uptick in demand for offices in Tsimshatsui from PRC corporates seeking to leverage on the proximity to the new cross-border transport hub. 

The expected rise in demand for offices in Hong Kong will be dependent on when the Chinese government chooses to release more detailed policies regarding the GBA. As it stands, it would appear that the Central office market is likely to benefit most significantly over the short-term as outward expansion of PRC corporates has a greater impact on office leasing demand than the need for professional services from Hong Kong. However, as companies in the GBA grow and market access is broadened, we would expect this dynamic to gradually change and ultimately support the growth of office markets in decentralised areas. 

This article was written by Denis Ma, Head of Research at JLL Hong Kong. It was originally published by the South China Morning Post on May 15, 2019.