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Chinese companies home in on Hong Kong

As China grows its presence on the world stage, take a look at why the free-market economy of Hong Kong is attracting Chinese companies.

July 01, 2016

Over the last five years, the number of mainland Chinese firms seeking office space in Hong Kong has more than doubled – and high levels of demand are showing no signs of stopping.

By the mid-point of 2016, mainland corporates accounted for no less than 40 percent of net lettings in the Central office market in terms of floor area.  Most of these firms are in the financial services sector, according to Denis Ma, Head of Research at JLL Hong Kong.

Whether they’re start-ups or large corporates, all are keen on office space in the city’s core business hub. “We often suggest places beyond Central [the central business district of Hong Kong] – and they are looking, but changing their mindset remains a slow and gradual process”, comments Ma. In fact, JLL forecasts suggest that rents in Central will be boosted by 5 to 10 percent owing to sustained demand from mainland China, coupled with low vacancy rates.

And while attention was previously focused more on the leasing market, in the last six months demand has started to shift towards investment

Financial might has enabled many of the bigger incoming companies to pay premiums and record high prices for en-bloc purchases, consequently driving yields lower. China Everbright, for example, bought Dah Sing Financial Centre in Wan Chai for HK$ 10 billion in February 2016.

Hong Kong: enticing, but why?

One key driver of rising interest in Hong Kong is its proximity to mainland China, says Ma. “It’s practical to set-up here, particularly when firms are constantly flying people in and out,” he explains. “There’s a cultural reason too – Hong Kong’s backdrop is ideal in more ways than one, especially in terms of language”.

As such, Hong Kong has become a significant first step in China’s strategy of global expansion, as it offers the kind of exposure firms need before going global, but with an element of safety. Another feather in Hong Kong’s cap is the professional services it has to offer in its capacity as a “regional financial and legal hub,” says Ma.

Favourable policies have also played a part. Many of China’s new policies aimed at liberalization have given Hong Kong a first mover advantage, subsequently boosting demand from mainland China. The Shanghai-HK Stock Connect and Mutual Funds Recognition Scheme, for example, acted as a catalyst for firms to enter the Hong Kong market while tangibly boosting leasing demand.

The changing nature of Hong Kong’s office space

With companies from the mainland playing a vital role in the short and long-term growth of Hong Kong’s office markets, their presence could well to incentivise more foreign companies to increase operations in the region.

Rising demand might potentially loosen the strong foothold multinational corporations (MNCs) have in Central, says Ma. “There’s a lot of competition from mainland China tenants in Central and it’s only going to increase. This means that some tenants will just get bumped out.”

For MNCs, this could mean looking elsewhere for office space in districts like Wan Chai, Hong Kong East and Kowloon East, all of which offer contemporary, sought after buildings at rents that are around 50 percent lower than those at Central.

With no sign of mainland demand waning, Hong Kong’s property market faces the risk of growing increasingly dependent on it. While many stakeholders welcome such demand, its critics believe it may be unsustainable. However, given Hong Kong’s competitive advantage over many other cities in the region, Ma believes that demand is likely to remain stable.

“Most banks already have a physical presence in Hong Kong, so we expect to gain interest from more securities trading and asset management companies,” he says. And while Hong Kong remains an expensive market, new supply in areas such as Kowloon East, dubbed ‘CBD-2’ is laying out a range of cheaper options.

Hong Kong, for now, is very much the market of choice for mainland companies with global plans

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