Hong Kong’s abandoned Kai Tak Airport, idle for 13 years, may hold the answer to a space shortage in the world’s costliest office market where banks including Goldman Sachs Group Inc. jostle for towers.
Visible across Victoria Harbour from the banking heart of Central, the overgrown landing strips and dilapidated hangars on which the government plans to build housing and a stadium cover an area almost the size of New York’s Central Park. The site could be redeveloped to add as much as 40 million square feet of prime offices by 2021, said Nicholas Brooke, founder of Hong Kong-based Professional Property Services Ltd. That’s three times as much as London’s Canary Wharf.
Brooke said that in the past six months he met with the Asian heads of four of the world’s biggest investment banks and heard the same message: If rents keep going up and Hong Kong doesn’t build more prime office space, they soon will have to relocate parts of their operations to other Asian cities.
“These are no longer threats but serious possibilities,” said Brooke, a former managing director of Swire Properties Ltd., the biggest commercial landlord in the city’s Island East district, another area that’s attracting tenants away from Central. “If we can’t provide the answer to their entire needs, then they’ll leave parts of their operation here” and move some of the others to Shanghai or Singapore.
Prime office rents in the financial gateway to China have risen 60 percent since July 2009, according to CB Richard Ellis Group Inc. Hong Kong rents in buildings considered of high quality were $9.80 a square foot per month at the end of the second quarter, compared with $8.40 in Singapore and $3.90 in Shanghai, according to Cushman & Wakefield Inc., the world’s biggest privately held commercial brokerage.
Singapore-listed Hongkong Land Holdings Ltd., the biggest office landlord in Central, has risen 34 percent since July 2009, compared with the 13 percent decline in the Hang Seng Property Index, which tracks the seven biggest developers traded in Hong Kong. Swire Pacific Ltd., the biggest landlord in the city’s Island East district, has lost 2 percent during the same period.
There was no new supply of prime office space in Central from 2007 to 2010, while this year developers may add a total of 123,000 square feet to the district, CB Richard Ellis research shows. That compares with more than 2.5 million square feet of new space added from 2002 to 2006.
“We’re getting close to a point when rents become unaffordable,” said Simon Smith, Hong Kong-based head of Asia research at Savills Plc. “If you look around other office markets in the world, they’ve all over time been forced to develop decentralized office areas.”
Canary Wharf, in the East of London, was transformed from disused docks and warehouses into the city’s second financial center in the 1980s and 1990s. The area contains about 14 million square feet of office and retail space, including the headquarters of HSBC Holdings Plc and Barclays Plc.
The prime office vacancy rate in Central, where HSBC and Goldman Sachs have regional headquarters, fell to 3.7 percent in July from almost 6 percent two years earlier, Los Angeles-based CB Richard Ellis said.
Rents in Central range from HK$60 ($7.70) to HK$170, according to CB Richard Ellis. In Kowloon East, home to the derelict airport, rents cost from HK$14 to HK$32.
“Hong Kong’s office market is like a dragon dance,” said John Siu, Hong Kong-based executive director at Cushman & Wakefield, referring to a Chinese festive dance in which a team manipulates a serpent’s body on poles to make it move in an undulating manner. “Any price change in Central would have a domino effect on other areas, but there won’t be much change in the price gap.”
Financial services companies began moving parts of their offices to Kowloon East -- an area of industrial complexes and lower-middle class housing that spans three subway stations --in the late 1990s as they sought to save on rent. The area, with a lower skyline because of its proximity to the old airport, has about 9.1 million square feet of office space, according to CB Richard Ellis.
The 320-hectare (791-acre) airport site is about seven miles across Victoria Harbour from Central. Mountains to its north and nearby skyscrapers forced pilots to make sharp turns at low altitudes to line up with a runway extending onto reclaimed land jutting into the harbor. The landing maneuvers and descent over heavily populated areas, including six-story buildings across the road from the main runway’s north end, ranked Kai Tak among the world’s most dangerous airports.
Since the airport’s relocation to Chep Lap Kok on the outlying Lantau Island, the Kai Tak site has been used as government offices, car dealerships and showrooms, a bowling alley and a golf range. French-Canadian diva Celine Dion performed there in January 1999.
Millennium City, a cluster of newer office buildings developed by Sun Hung Kai Properties Ltd., has attracted the back offices of banks such as Standard Chartered Plc and Bank of East Asia Ltd. to East Kowloon. Manulife Financial Corp. last year moved its Hong Kong headquarters to the district, while PricewaterhouseCoopers LLP has also relocated part of its operations there.
“We can really have a Canary Wharf here if the government gets its act together,” said John Davies, a Hong Kong-based executive director at CB Richard Ellis.
After spending 10 years in public discussion and consultation, the government in 2007 came up with an outline for the site’s redevelopment. The current plan includes building more than 33,000 units of public and private housing, 20 million square feet of office, retail and hotel spaces, cruise terminals and a stadium.
The plan for the development of Kai Tak “had evolved several times to meet changing community aspirations” before it was approved, the government’s Civil Engineering and Development Department, which is in charge of the development of Kai Tak, said in an e-mail reply to Bloomberg questions.
Central’s surging costs have already prompted defections. In 2007, Morgan Stanley, Credit Suisse Group AG and Deutsche Bank AG moved their entire operations in the city across the harbor to the International Commerce Centre in West Kowloon, a reclaimed area that’s a five-minute train ride from Central.
Property prices on the Kowloon Peninsula, north of Victoria Harbour, have historically been below those of Hong Kong Island, home to the city’s financial district and its most expensive residential area. Before the completion of ICC, few banks would have considered setting up front offices in Kowloon, said Davies.
The move to West Kowloon “has removed the negative stigma of Kowloon,” he said. “To attract the same caliber of clients to East Kowloon, the infrastructure in that area needs to be improved.”
Before that, the government needs to be persuaded to change existing plans for the old airport, including relocating the stadium to make way for more office buildings.
The government is “determined to increase the supply of top-quality office space,” Secretary for Development Carrie Lam said in a speech at a Sept. 17 conference in Hong Kong. Lam cited the development of “new office nodes” including West Kowloon and Kai Tak as part of its strategy, along with freeing up more land in Central and revitalizing former industrial areas.
Gavin Morgan, managing director of office at Jones Lang LaSalle Inc. in Hong Kong, is among those betting Kowloon East may help solve the city’s office space shortage.
“Within the next decade, Kowloon East will be made the largest commercial district in Hong Kong,” he said. “But it will very much be considered a non-core central business district because there’s not a dominant landlord developing the whole district.”