Hong Kong’s foreign bankers bid farewell to Central
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Hong Kong’s bankers have a peculiar problem when shepherding overseas clients around the city: persuading them it is easier to walk to meetings than book a limo. The central business district’s compact nature is unique among financial centres and has been a source of pride, even as it has spurred the highest office rents in the world.
Where once it was international bankers, now it is Chinese companies that are driving those rents ever higher. Hong Kong, no stranger to China-induced bubbles, is wondering how far this one can go. Bankers, increasingly forced into less central neighbourhoods, will meanwhile have to choose between taxis and traffic jams and taking the underground, known as the MTR.
To lease the upper floors of a prime Hong Kong skyscraper, companies must pay $279 a square foot a year, says PwC. That is 75 per cent more than the $158 paid in New York, the second most expensive city. Tokyo at $150, London at $114 and San Francisco at $113 round out the top five. Chinese groups took a record 43 per cent of space leased in Hong Kong’s Central District last year — double the proportion of five years ago, according to property experts Jones Lang LaSalle.
Driving demand are Chinese financial groups including smaller banks, fund managers and brokers, which are following their clients’ interest in the growing financial links between Hong Kong and the mainland, such as the Stock Connect trading scheme.
Leasing is brisk. HNA Group, the acquisitive Chinese conglomerate, recently almost doubled its space in Two International Finance Centre, Hong Kong’s premier building, for $270 per square foot. The 88-storey tower offers unparalleled views of the harbour and tenancy is considered a sign of success as well as deep pockets.
“Mainland corporates really only want IFC Two, not even IFC One. It has to be iconic,” said one commercial property investor, referring to the IFC development’s smaller 39-storey tower.
Chinese enthusiasm extends to whole buildings. Last year, Everbright, the state-owned conglomerate, and property developer Evergrande each bought towers in Central for a combined $2.9bn in the city’s priciest ever commercial transactions. Other groups that have bought offices outside Central recently report immediate overtures from mainland buyers.
Corporate China’s interest coincides with retrenchment and caution among multinational groups. “I’m not sure given the Hong Kong stock market and the global markets picture, that they are strong enough for international banks to reinvest in space in the world’s most expensive office district,” says Charles Wong, Asia head of listed real estate at AMP Capital. “There’s no other gateway city, anywhere with such big gaps in rents between districts.”
Rents in the east of Hong Kong Island or even across the harbour in East Kowloon near the old Kai Tak airport are half or less the levels in Central. In 2014, Citigroup bought a 21-storey tower in East Kowloon for HK$5.4bn ($699m) and last year moved in 3,000 of its employees. Many Citi staffers, meanwhile, fought hard not to relocate from Central, where the bank’s downsized presence means its building is no longer named Citibank Plaza.
Last month Freshfields Bruckhaus Deringer became the first top-tier law firm to make plans to move fully out of Central, leasing new space to the east, from 2018. Fund manager AllianceBernstein is following suit. “Ten years ago multinationals wouldn’t even look outside Central,” said Paul Yien, regional director of Hong Kong markets for JLL, who sees the moves slowly changing the face of Hong Kong. “The whole harbour will become a core business district.”
As recently as 2010, Deutsche Bank, Morgan Stanley and Credit Suisse demanded big rent reductions for the inconvenience of moving from Central across the harbour to Kowloon as key tenants of a gleaming new skyscraper. Bankers in Central still routinely describe trips to the 109-storey International Commerce Centre — less than 15 minutes on the MTR — as “going to the dark side” but early predictions of mass staff defections came to naught.
With no sign of a let-up in mainland Chinese demand, few analysts expect prices to ease soon, leaving the current exodus from Central firmly on track. The bankers, lawyers and fund managers who feel displaced will have to comfort themselves with the fact that Hong Kong’s MTR has excellent 4G mobile coverage. And taxi drivers still know how to find the old Citibank Plaza.
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