Is Kowloon Hong Kong's next Central?

It is now home to Citibank and JPMorgan’s front offices, amongst others.

With Kowloon East positioned to become the country’s second Central Business District (CBD2) following the government’s push to alleviate the pressure of space-starved Central, it could soon also be crowned as Hong Kong’s “Central2” thanks to the anticipated commercial site atop the West Kowloon Express Rail terminal, a report by Knight Frank revealed.

This commercial site is said to not only be the largest of the 2019-2020 land sale programme, but also the largest of its kind in recent decades. With area of approximately 5.96 ha, the site will be home to three office towers providing up to 3.21 million sqft, with 2.8 million of office space, making it bigger than the International Financial Centre complex (2 million sqft) and of similar size to the nearby International Commercial Centre (2.3 million sqft).

Also read: Can Hong Kong's first smart city relieve pressure off of space-starved Central?

According to Patrick Mak, Knight Frank’s executive director, general manager and head of Kowloon office services, Kowloon is breaking free of its traditional low-rent profile.

“In recent years Kowloon has seen more than one building achieve gross rent of over $100 psf. One such example is the newly completed K11 Atelier, with gross average office rent of over $100 psf,” he said. “Considering that the building’s roughly 75% efficiency rate, this figure converts to $133 psf.”

He also added that most notably, a recent lease in the building of roughly 3,000 sqft gross was signed for up to $118 psf gross, equivalent to $157 psf net, which is an all-time record for Kowloon office transactions. Since Mizuho Bank took residence in October 2016, the building has continued to receive a good response from the market, seeing an average absorption rate of about 9.8% per month, he noted.

“This reflects the strong potential for premium Grade-A office buildings in Kowloon,” he explained.

Similarly, the International Commerce Centre is also seeing an average of roughly $100 psf gross. Considering the building’s efficiency rate of about 70%, this translates to$143 psf net. The building currently has less than 1% vacancy and is another good example of the area’s premium Grade-A office absorption, Knight Frank noted.

Also read: Hong Kong Island's pricey office rents push cash-short tenants to Kowloon

“This suggests that the Kowloon market is transforming from ‘lower cost’ to strategic location and quality’,” Mak highlighted. “Given average premium Grade-A building rent of roughly$150 psf net, then assuming 3% inflation per year between now and 2025, when the West Kowloon terminal commercial site is expected to be completed, plus say a 5% premium for new-building quality, then net rent of up to$190 is certainly achievable in Kowloon. Further, by then Kowloon will have seen several more buildings with net rent reaching up to the level of Hong Kong Island’s Grade-A and premium Grade-A market.”

Kowloon has always been considered the lower-cost alternative for office space compared to Hong Kong Island, with average rents 30-50% lower than those across the harbour, Knight Frank said.

Thanks to its lower rental costs, Kowloon’s tenant mix trend has changed. Where banking and financial firms largely avoided the area, only looking to it to house its back-up operations, more companies have decided to relocate their Hong Kong Island front office to Kowloon.

In 2016, banking and finance accounted for just 26.58% of major occupiers in the central part of Kowloon, a figure that rose to 35.23% in 2018 and elevated banking and finance to a fast-developing sector among major occupiers in the TST area.

“The CBD2 area is now home to Citibank and JPMorgan’s front offices, a result of large-scale consolidation in the companies’ respective long-term real estate strategies. In the TST area, we are also seeing more and more Japanese and Taiwanese banks, whom have long been present in the area and are now expanding and consolidating further with their front line offices,” Mak said.

Also read: Property market to rebound in 2019 as investors chase decentralised assets

Knight Frank further noted that the West Kowloon terminal site will likely be the first in Hong Kong history to surpass $100b land price, assuming a mid-range figure of up to $30,000 psf. Adding an estimated $100b in development costs, the total consideration of the parcel could reach as much as $200b.

“The huge potential impact of the project leaves us very optimistic that it will catalyse the whole of Kowloon into a new commercial hub – a “Central2” formation, in addition to the CBD2 concept,” Mak said.

However, Kowloon’s potential is limited by the huge amount of capital involved that will likely push developers to form conglomerates or joint ventures through which to bid and run. “Kowloon’s short-term prospects, however, are not as optimistic as those of the long-term, particularly given the limited stimulus as well as economic and political concerns,” he warned.
Knight Frank forecasts an overall 1-3% rental increase, despite its highly optimistic long-term view of a maturing West Kowloon.

“The recent forfeiture of deposit by Goldin Group on the awarded Kai Tak commercial site has revealed the shaken confidence of some developers in the short- to mid-run amid looming political and economic uncertainty. There are still more adjustments coming in the Kowloon market before a new upward trend is expected to develop based on the “Central2” concept becoming more widely recognised and accepted,” Mak concluded. 

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