Why Hong Kong's Developers Are Throwing Bricks

State-backed Cyberport is helping push rents down

Yat Siu, the founder of Outblaze, a Hong Kong operator of e-mail services for corporations, used to be embarrassed to bring out-of-town clients to his office, in a drab building next to an outdoor market redolent with the pungent smells of fresh meat and fish. But last month, the 75 employees of Outblaze moved to Cyberport, a sleek glass-and-steel complex on the south side of Hong Kong Island. The property was reclaimed from the South China Sea by the government and earmarked as a center for digital startups and established high-tech stars. Siu raves about the facilities, which, among other things, allow for easy high-speed Net connections. "Everything's wired," he says. "And there's a sea view."

While Siu is happily relocated, however, property owners on the crowded north side of the island keep grumbling. Land values and real estate sales have traditionally been the very heart of Hong Kong's prosperity. As Cyberport opens, the vacancy rate in Central, Hong Kong's main business district, is already 10.3% and rising. Cyberport is not the only culprit: There's lots of new construction in Central itself, including an 88-story office tower. But Cyberport is different, since it is government-inspired, with the administration of Chief Executive Tung Chee Hwa, in a much-criticized deal, awarding the design and construction contract to PCCW Ltd. (PCW ), the dominant local telecom operator controlled by Richard Li.

Conceived during the Internet boom, Cyberport was seen as a way to attract tech companies from overseas. But now that the boom has gone bust, the promise that it would not cannibalize existing commercial space looks naive. "The original premise was that this is not competing with the office sector in Hong Kong, but it appears that it is," says Nelson Wong, an executive at property manager Jones Lang LaSalle.

One issue is Cyberport rents. A real estate source says that when hidden discounts are included, offices at Cyberport lease for a third the price of equivalent space in the north. One local company that is suffering is Swire Properties Ltd., which has lost several important tenants to Cyberport. "We are not losing tenants to any buildings other than Cyberport," complained Keith G. Kerr, Swire's managing director, at a recent ceremony marking the completion of a new northside office tower.

Betty Fung, the official responsible for Cyberport, insists that the government is doing nothing to subsidize rents: "The government's contribution is just the 24 hectares of land." At $1.50 per square foot per month, she adds, rents "are not excessively cheap." She swears the development will attract new companies to Hong Kong, especially as the project nears completion at decade's end. Cyberport will eventually offer 120,000 square meters of office space, 2,700 apartments, retail space, an IT training institute, a conference center, and a five-star government-owned hotel.

Yet even the project's boosters concede that Cyberport has had problems attracting new IT operations to Hong Kong. "One problem is that the fall in the property market has taken away Cyberport's raison d'etre," says Sin Chung Kai, who speaks for the IT industry in the Legislative Council. During Hong Kong's real estate bubble, new companies couldn't afford to move into the city, he notes. But "because rentals have dropped substantially, Cyberport becomes less attractive."

Fung says she is getting many inquiries but that she needs to drum up more interest from Chinese companies as well as multinationals. Meanwhile, Cyberport managers are busily marketing the project's charms. Robert Lee, chairman of infrastructure at PCCW, points out that practitioners of the mystical art of feng shui say that in 2004, when much of the complex opens, Hong Kong's good luck will be concentrated in the south. Northside landlords say that may be true--but that luck has nothing to do with it.

By Bruce Einhorn, with Mark L. Clifford, in Hong Kong

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