"Energizing Kowloon East" programme to be new energy for office market

The news of nine top Hong Kong developers joining forces to develop Kowloon East, and the local government taking up office space there, is sure to invigorate the area.

Hong Kong’s new Chief Executive, John Lee, has restructured the government, increasing the number of policy bureaux from 13 to 15 by adding a bureau centred on culture, sports and tourism, and splitting the Transport and Housing Bureau. As a result, numerous departments also need to expand. Recently, the government asked its Government Property Agency (GPA) to lease several commercial buildings in East Kowloon in One Kowloon, Landmark East and Enterprise Square Five. Although the 110,000 sq. ft. the government will lease is a drop in the ocean when viewed against the area’s extremely high vacancy rate, the move is bound to attract other companies and promote the "Energizing Kowloon East" programme.

According to the latest information from Midland Research, 446 office transactions were registered in the first half of 2022, down about 38.7% from 2021’s 728.

Overall commercial property transactions (Jan to June 2021)

Overall commercial property transactions (Jan to June 2022)

I sampled 436 transactions in the first half of 2022 from Memfus Wong. Then I divided them by districts, size and transaction value to check the latest office buyer’s preference.

Hong Kong

Hong Kong Island registered 188 transactions of the sample. Sheung Wan took 61% of the transactions – 64, and Wan Chai saw more than 61% with 51. The Exhibition Centre MTR Station continued to draw attention to Wanchai, with 38 transactions recorded in NovoJaffe, which dominated 20% of the Hong Kong transactions; for instance, three whole floors with naming rights to the building were taken by Golden Resources (0677) at HK$159Million or HK$23,700/sq. ft., involving a gross floor area of 6,729 sq. ft.

On the other hand, transaction volume remained low in Admiralty and Central. We expect a few redevelopment projects to enter the market in the next few years, further increasing these areas’ vacancy rates, putting even more downward pressure on second-tier offices.

After analysing the size of the offices in the sample, 85 (45.2%) had a saleable area smaller than 500 sq. ft, clearly investors’ favourite. Those bigger than 500 sq. ft to 1,000 sq. ft. were the second most popular, with 45 transactions. Some 21 offices sold were bigger than 10,000 sq. ft., and all came from No. 1111 King’s Road in Quarry Bay.

Investors were most interested in offices in the HK$5 million to HK$10 million price range, which had 61 transactions (32.5%), a new investment trend. Offices under HK$5 million were second, with 38 transactions for 20.2% of the total, and those in the HK$10 million to HK$20 million bracket saw 35 transactions. Wan Chai and Quarry Bay had 22 transactions over HK$100 million.

Source: Memfus Wong?

Source: Centaline Agency?

Next, I compared the average price and rent to the latest asking price and rent over the past four years, using data from Centaline Agency. Asking prices in Sheung Wan and Wanchai were noticeably higher than in 2021 and close to 2019’s average. However, there was a gap between asking rents and the average rental of most luxury grade A offices between 2019 and 2020.?

Source: Centaline Agency?

Kowloon

Kowloon recorded 210 office transactions for 48.2% of overall office half-year sales. Tsim Sha Tsui had more than 62% of the transactions at 74, and Mongkok had more than 62% with 57 cases.

Analysing size, I found 111 transactions (52.9%) for offices smaller than 500 sq. ft. Offices bigger than 500 sq. ft. to 1,000 sq. ft. saw 55 transactions for second place. There was only one transaction bigger than 10,000 sq. ft., an entire floor on 28/F, No. 888 Lai Chi Kok Road in Quarry Bay.

Offices transacting under HK$5 million were the most popular, with 98 sales (46.7%). Meanwhile, those transacting in HK$10 million to HK$20 million range over saw 54 transactions, to take 25% and second place, and those in the HK$5 million to HK$10 million saw 37 (17.6%) for third. Two offices transacted for more than HK$100 million, one in Cheung Sha Wan and the other in San Po Kong. Like in Hong Kong, investors favoured offices in the 500 sq. ft to 1,000 sq. ft. with prices under HK$10 million.?

Source: Memfus Wong

Source: Centaline Agency?

I also compared the average price and rent against the latest asking price and rent over the last four years using data from Centaline Agency. Recent asking prices in Tsim Sha Tsui and Kwun Tong were obviously higher than in 2021 and close to 2019’s average. Rents were narrowing the gap between 2019 and 2020.

Source: Centaline Agency?

Source: Memfus Wong

Banking and insurance firms previously leased Kowloon East offices as back offices. However, the epidemic has lasted for two years, and the global economy has been battered. Moreover, the US Fed’s interest rate hike has worsened the situation. As a result, fewer companies expanded, and some even terminated their tenancies before expiration, leading to a surge in vacancies.

The new government has stated that Hong Kong will have a double-track strategy for recovery, actively promoting the development of emerging sectors and consolidating the city’s original status as a financial and trade centre. Hopefully, this will encourage more China-funded companies to return to list in Hong Kong, which would be good news for the office market.

In more good news, last week, nine developers announced they would join forces to turn the Kai Tak seafront into a commercial-cum-residential hub named Park Peninsula. They are Chinachem Group, China Overseas Land and Investment, Empire Group, Far East Consortium International, Henderson Land Development, K Wah International, New World Development, Sun Hung Kai Properties and Wheelock Properties.

Occupying the seafront of what was the runway of the former Kai Tak airport, Park Peninsula will be a combination of leisure, sports, tourism, commercial and residential developments.

The development will involve about 4.84 million sq. ft. of green and open space. This area will include Metro Park, Kai Tak Sky Garden, Kai Tak Cruise Terminal Park, Kai Tak Runway Park and Kai Tak Sports Park, which is 2.3 times larger than Victoria Park and the largest in Hong Kong.

Park Peninsula will be connected to the core districts of Kwun Tong and Kowloon Bay through the construction of elevated pedestrian walkways with automated pedestrian conveyors and cross-harbour pedestrian and bicycle bridges. It will have a series of bus and green minibus stations. Runway Park Pier will be a pick-up and drop-off point connecting Central, West Kowloon, Tsim Sha Tsui East, Hung Hom and Kai Tak, providing fast and direct transport services.

The new project is part of the government's long-term Energizing Kowloon East plan, transforming the area into a core business district to rival Central.

As promulgated in the 2017 Policy Agenda, the initiative was extended to San Po Kong, focusing on enhanced connectivity, improving the environment, and promoting vibrant and diverse development.

Commercial space gross floor average in Kowloon East has risen by 70% to 2.9 million square metres from 1.7 million sq m in 2012. Upon completion of the planned developments, including the areas in Kowloon Bay and Kwun Tong, commercial space would increase to more than 4 million sq. m. In discussing the plan, former Hong Kong Chief Executive Carrie Lam said its scale would be on par with Central, the CBD.

The government and the private sector investing resources to build Kai Tak’s infrastructure are sure to bring new energy to the whole Kowloon East commercial district.

Thank you