SHK Properties West Kowloon project a good step

In November 2019, Sun Hung Kai Properties (SHKP) won the tender for a site atop the West Kowloon Station that connects Hong Kong with Mainland China through the Express Rail Link. It was arguably the most eye-catching land site transactions of the year, because of the sheer size of the development and the record price tag. Furthermore, the tender was conducted at a time when political and economic uncertainties surrounding Hong Kong were intensely high. When the tender result was announced, much focus was on the small number of bids and the accommodation value of HKD13,345 per square foot, which stood near the low-end of “market expectations”. Despite a successful sale, the result was considered “disappointing”.

Nevertheless, if we look beyond what is clouding Hong Kong today, confidence of investors with a long-term view of the city appears to have remained relatively unaffected.

To begin with, the project is a highly demanding undertaking, with more than three million square feet in floor area and a projected total investment of more than HKD60 billion. Therefore, it is not a surprise that only three bids were submitted for the site. Two of them were from single bidders and the third bid was from a 5-party consortium. After all, there are only a handful of developers/ investors who have the development expertise and the financial capacity to take on a project of such scale. The mere fact that a developer commits such a hefty amount in Hong Kong is itself a strong vote of confidence in the long-term prospects of the city.

SHKP has begun to introduce strategic investors to participate in the development – the first being an investment company by the Kwok Family Companies, privately owned by SHKP’s largest shareholder. As SHKP continues to seek other strategic investors, and if overseas investors are brought into the project, it will be further testament that confidence in Hong Kong’s long term prospect is not limited to home grown players.

As for the suggestion that the accommodation value (per square foot price) is low since it is near the low-end of market expectations, we believe there is an objective way to gauge.

We note that the MTR travel time from Central station provides a good indicator for achievable rent and capital value of an individual office asset. The future office buildings on the High Speed Rail site will be just over 20 minutes via the MTR from Central station (including walking time). As shown in the figure, the estimated capital value is very much in line with expectations, compared with current pricing of existing assets and other recent land sales, if only travel times were used to determine value.

From a long-term supply perspective, it is imperative that Hong Kong continues to see a healthy pipeline of office supply, to address increasingly sophisticated accommodation requirements of occupiers. With only 1.8 million square feet of new supply per annum over the past decade, and vacancy hovering at frictional levels, the options for many corporate tenants have been limited. This situation is not improving any time soon, with upcoming supply being minimal, especially in core locations. Between 2020 and 2023, office supply amounts to about two million square feet per annum. That in core sub-markets is even tighter, representing a mere 15% of new supply. No wonder that whenever a high-spec office tower is built in a reasonably convenient location, pre-commitment is typically high. Besides cost consideration, the aspiration for quality workspace has motivated many corporate movements.

The High Speed Rail development will add some three million square feet of office space in the West Kowloon area, on top of 1.7 million square feet in International Commerce Centre. This will be a welcomed addition of office space to the location. Not only will it offer more high quality accommodation options for occupiers, it will also bring the West Kowloon area closer to the needed critical mass to be a true and thriving office node. Adding this to other potential commercial developments in the West Kowloon Cultural District, office space in this location is likely to be highly sought after, as the node matures.

Indeed, the ease of transportation in West Kowloon is unrivalled given the surrounding infrastructure. The precinct has direct connectivity to the High Speed Rail, Airport Express line and the MTR Tung Chung line, as well as highways to Hong Kong Island, the airport and other border links with China. This node will likely become a key gateway connecting Hong Kong with the rest of the Greater Bay Area (GBA). As corporates set up functional offices across various hubs in the GBA, the West Kowloon node would be a natural location of choice.   

The article was originally published on South China Morning Post on January 8, 2020