A competitive edge
Nicolas Spiro says Singapore’s commercial property market seems better placed than Hong Kong’s at first glance but only if you overlook key facts
Hong Kong policymakers have their work cut out. The damage wrought by a succession of shocks over the past several years has raised uncomfortable questions about the city’s future as a global financial centre. The biggest blow by far was the imposition of draconian pandemic-related restrictions that cut Hong Kong off from the rest of the world as well as from the mainland.
Even the government’s move in September to scrap stringent hotel quarantine requirements for incoming travellers still leaves the city without a road map for a full reopening. The severe problems faced by the mainland show how much Hong Kong’s fortunes hinge on Beijing’s zero-Covid policy.
Contrasting approaches to the management of the pandemic have put the long-standing rivalry between Hong Kong and Singapore under increased scrutiny. Having begun to open up to the rest of the world last year, Singapore has bolstered its appeal in the eyes of international investors.
In the property market, the performance of the two has diverged sharply. Nowhere is this divergence more pronounced than in the office market, which itself is under intense pressure due to the virusinduced shift to hybrid working and the economic fallout from the dramatic rise in interest rates.
In Hong Kong, Covid-19 erupted when the fundamentals of the office market had already deteriorated significantly since grade A rents peaked in the second quarter of 2019. According to data from CBRE, net take-up has contracted for 10 of the last 12 quarters, helping push up the overall vacancy rate from 6 per cent in 2019 to a record 14.4 per cent.
Moreover, the pandemic coincides with a sudden surge in supply. A massive 6.8 million square feet of new space is expected to be delivered this year and next, data from CBRE shows. The supply boom will exert further downward pressure on rents. Among the leading office markets in the Asia-Pacific region, the outlook for rental growth in Hong Kong in the next few years is the worst, along with Tokyo.
In Singapore, office rents are close to their record high set in the first quarter of 2009, data from CBRE shows. Net take-up in the first three quarters of this year was higher than for the whole of 2021.
The vacancy rate in Singapore’s core central business district (CBD) has fallen to just over 3 per cent. Indeed, an analysis by Bloomberg Intelligence from September noted Singapore’s office rents had overtaken Hong Kong’s for the first time since 2009.
However, these headline-grabbing statistics are somewhat misleading and overlook crucial differences between the two markets that give Hong Kong an edge in key areas. While few property sectors are as landlord-favourable as Singapore, Hong Kong has become increasingly tenant-friendly at just the right time.
For starters, the territory’s office stock is much bigger and more diverse. While Singapore’s office market is centred around the city’s CBD, less than a fifth of Hong Kong’s grade A stock is in Central – still the world’s most expensive office district – and as much as a third is in non-core districts where rents are much cheaper, data from CBRE shows. It stands to reason, therefore, that average rental rates are higher in Singapore, where grade A stock in the CBD accounts for nearly 70 per cent of the city’s overall stock, according to data from Cushman & Wakefield.
Second, the increasing maturity and ramp-up in supply in decentralised office districts in Hong Kong provide occupiers with cost-effective solutions to lease space in non-core locations. Although rents for the market as a whole are down 28 per cent from their peak, the price differential between Central and Hong Kong East still stands between 55 and 65 per cent, according to CBRE.
Third, while non-core districts benefit from tenants relocating to newer and higher quality buildings, some prominent occupiers have always been based in decentralised areas. Many tech firms – which are currently going through a severe downturn – began leasing space in Hong Kong East, unlike in Singapore where their expanding footprint in the CBD is seen as a risk given the retrenchment in the industry.
Ada Choi, head of occupier research Asia-Pacific at CBRE, said it was questionable whether “decentralisation” was even the right term for describing trends in Hong Kong’s office market, particularly given the flight-to-quality within core districts themselves as tenants had more options at their disposal than in supply-constrained Singapore.
Choi also said Hong Kong benefited from its highly experienced office landlords’ sizeable portfolios spanning core and non-core districts.
To be sure, Hong Kong’s unique selling proposition as a financial centre – its role as a gateway to the mainland – has taken a beating. This is likely to continue to benefit Singapore for some time. Yet, in the meantime, and especially once the border reopens and mainland demand for Hong Kong real estate picks up, the tenant-friendly conditions in the city’s office market will provide a critical and underappreciated underpinning for the recovery.