2 Advance COMMERCIAL ISSUE

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2 2 Advance COMMERCIAL ISSUE Executive Summary Hong Kong s continued success as a major international business centre depends on its continued provision of appropriate commercial office space for business growth. The government s plan to transform Kowloon East into Hong Kong s next generation CBD (branded as CBD2) is important for future business and economic growth in the city. In achieving the realization of CBD2, an all-encompassing plan for the city at large that embraces an expansion of the existing business districts on Hong Kong Island should not be overlooked. This broad and progressive approach will complement the pipeline of commercial development potentially available in Kowloon East. The Victoria Harbour region, spreading east from Central on Hong Kong Island and connecting across the Harbour at Hong Kong East, should form the basis of the Government s long-term vision for Hong Kong s CBD development.

3 3 Broader Hong Kong Commercial Space Master-plan Embraces CBD2 Development

4 4 Advance COMMERCIAL ISSUE The success of CBD2 at Kowloon East can be achieved if a number of key issues are addressed, namely: Seamless integration with existing business districts Appropriate commercial real estate clustering across Kowloon East Efficient connectivity with key business districts, by both the MTR and road Extensive gentrification works to complete the area s transition from what is mainly an industrial district to a commercial centre A clear pipeline allowing future commercial development and ownership structures Providing incentives to the private sector as a partner in order to accelerate progress The Hong Kong Government should also consider adopting policies in existing and new districts that encourage: Refurbishment and redevelopment of existing office space Accelerated incorporation of stratified buildings Expansion of core commercial clusters including the connectivity of these locations and improved amenities business district, but most importantly, what Hong Kong must immediately implement in order to address the lack of commercial office space over the next 10 to 15 years while Kowloon East is developed for the long-term future. CBD2 Hong Kong s Future CBD Extension The key essence behind the Government s announcement of the CBD2 plan is to ensure a sufficient supply of Grade A office space for the future growth of large occupiers in Hong Kong. A total of 11 million sq ft (GFA) of commercial space is forecast to be built on the Kai Tak development area, of which we expect about half will be Grade A office for use by the private sector. The Government has indicated that a further approximately 31 million sq ft (GFA) of commercial space can potentially be made available in the long run through either green field or brown field developments in Kowloon Bay and Kwun Tong. However, as the development of these sites will mainly be overseen by private owners, it is not clear how long it will take before these numbers are realized. In this paper we outline our preliminary thoughts on how CBD2 should be developed to become a core A more realistic estimation suggests that a potential stock growth of 14 million sq ft net (or approximately 18 million sq ft gross) within the CBD2 area of Kwun Tong,

5 Broader Hong Kong Commercial Space Master-plan Embraces CBD2 Development 5 Kowloon Bay and Kai Tak is possible toward the end of the next decade. This would bring the area s total Grade A office stock level to about 26 million sq ft net, so that Kowloon East would be roughly on par with the size of Central as a commercial district. Kowloon East Grade A Office Stock 30 Future Stock Growth 25 million sq ft (NFA) E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Source: Jones Lang LaSalle Research Despite the uncertainty behind the delivery timeline of CBD2, such a volume of space provides some line of sight for business growth beyond However, what is most important to international businesses the government aims to attract is the quality a true CBD location provides. Adopting a broad long-term plan for the growth of Hong Kong s commercial districts, and adopting the policies discussed below, we foresee the successful emergence of a next generation CBD at Kowloon East.

6 6 Advance COMMERCIAL ISSUE Removing the Connectivity Barrier Currently, Kowloon East is perceived to be relatively remote compared with other office submarkets. Generally, tenants have made the decision to relocate to Kowloon East due to its more affordable rental level and availability of contiguous spaces. To a certain extent, tenants moving to Kowloon East have been trading business convenience for lower prices. Shatin to Central Link (SCL). This will become the most critical business railway link given its direct access to the core business districts, including the Central CBD. However, this can only be successful if the majority of office buildings within CBD2 have proficient access to the SCL. The monorail route currently proposed to connect Kwun Tong, Kowloon Bay and Kai Tak will help to improve intra-district connections within CBD2. The concepts behind CBD2 can, in part, overcome this problem and remove its connectivity barrier with other commercial clusters with its leverage on the proposed However, without a more direct and express connection between the buildings and the SCL, the accessibility of Kowloon East as a CBD will remain an unsolved Rental Discount of Kowloon East to Other Submarkets $0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 -$10 -$20 HKD per sqft (NFA) -$30 -$40 -$50 -$60 -$70 -$80 -$90 Source: Jones Lang LaSalle Research Central Wanchai/Causeway Bay Tsimshatsui Hong Kong East

7 Broader Hong Kong Commercial Space Master-plan Embraces CBD2 Development 7 disadvantage to some occupiers. A careful re-examination of the proposed monorail route running between these three districts is needed to ensure that commercial developments in the area are able to connect efficiently with the SCL. Kowloon East In addition, the Wanchai Bypass spanning across the northern bank of Hong Kong Island will not only ensure more efficient road transportation links between the Hong Kong Island office submarkets, but also indirectly provide an express road route between Kowloon East and the Central CBD. This is an important factor for senior management of businesses who will require daily access by car.

8 8 Advance COMMERCIAL ISSUE Facilitating the Right Developments While facilitating the development of large floor plate commercial space in the existing CBDs is of high importance, the government needs to make appropriate partitioning to the green field sites in CBD2 in order to accommodate the growing, longterm requirements of large MNC occupiers. The government s scope is limited in terms of provisions that can be made to control the plot sizes of existing brown field redevelopment sites in Kowloon Bay and Kwun Tong. The opportunity therefore lies in Kai Tak, where the government is able to deliver the appropriate development opportunities for the type of businesses that traditionally occupies CBD office space. The developments in Kai Tak should include: Large floor plates to attract large occupiers, especially those in the banking and finance sector

9 Broader Hong Kong Commercial Space Master-plan Embraces CBD2 Development 9 Simple ownership structures the location cannot succeed in attracting the most sophisticated CBD occupiers if ownership of the buildings there is mostly stratified Environmental sustainability features to meet the growing demand from corporations Sufficient and easy access to car parking spaces A close access to business amenities Private developers should be encouraged to commit to the area in the long term, which will facilitate the development of suitable amenities which are required to increase the value of the district. This will ultimately ensure that the financial returns on developers investments grow in line with the district, as it is transformed into a core commercial district. If the above criteria can be adequately addressed in the next years, we will have a new destination to accommodate the requirements for business growth from the current CBD. However, with a market with low vacancy and very limited new supply in the interim, it is also vital to consider the more immediate problem sought after by business space that can be developed in the current core districts. Seamlessly Integrating the Medium and Long Term CBD has become the accepted term the world over for a city s commercial core and the home to its most important corporate occupiers. The CBD is not merely an area with a group of accessible Grade A office buildings. When reviewing the structure of a CBD it is imperative to look at the drivers of business hub locations. These must include: Quality hotels and serviced apartments A wide variety of places to hold conferences, eat, socialize, exercise, and shop Abundant public and private transportation to promote connectivity Quality office space in clusters Central, Wanchai, Causeway Bay and Hong Kong East are all either complete or well progressed in achieving these vital components. In contrast, Kowloon East requires significant development to achieve the necessary provisions to succeed as a CBD. As a supporter of CBD2 and its eventual transformation into an extension of the core of Hong Kong, it should fit into a broader development plan for the city s CBD overall.

10 10 Advance COMMERCIAL ISSUE Preserving Hong Kong s Commercial Future An interim plan embracing the traditional commercial locations on Hong Kong Island will be instrumental in addressing the anticipated supply vacuum of new buildings over the next years before the maturing of CBD2 as a CBD extension. Despite traditional perceptions about location, West Kowloon and Causeway Bay are already offering an alternative to the once-exclusive Central tenants. Some in the high end business sector are leading the way with an appetite to expand beyond Central s 23 million sq ft of Grade A office space, of which only 60% caters for MNCs. To facilitate sustained commercial growth and the success of CBD2, the government should also support the evolution of Wanchai North, Causeway Bay and Hong Kong East into core business locations outside Central. In an earlier paper Hong Kong, The World s Most Expensive Location... Or A City In Metamorphosis?, we outlined our thoughts on Central s progressive expansion east along the northern Hong Kong Island shoreline towards Taikoo Shing. Where It Can Happen Before the maturity of Kowloon East as part of the Government s CBD2 plan over the next years, the next stage of Hong Kong s CBD development over the decade ahead will remain on Hong Kong Island. This natural progression, east along the Island, will firmly establish the city as one of the world s leading CBDs, with up to 55 million sq ft of Grade A office space. A number of existing commercial clusters with the greatest potential are as follows: Wanchai North - the commercial cluster surrounding the Wanchai government office complex (Wanchai Tower, Immigration Tower and Revenue Tower) - The government is able to release the three captioned towers to private developers for redevelopment into a single large floor plate building, or buildings with large podium floor plates, the like of which are lacking in Hong Kong and highly sought after by the finance sector. Wanchai North, supported by existing office space with large floor plates already attracting traditional CBD occupiers (finance and professional services); this area, currently with a 3.9 million sq ft net of Grade A office space, can grow to a 5.8 million sq ft hub, leveraging a district of 14.6 million sq ft. The area has excellent amenities to support the high end business services sector, with direct access to the traditional CBD.

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12 12 Advance COMMERCIAL ISSUE To make this district successful, the Government could support a comprehensive redevelopment of the Wanchai government office complex in a way that suits traditional CBD occupiers, and not simply a refurbishment of the existing structures, which may not fit the specification requirements of the more sophisticated occupiers currently in Central. The redevelopment of this site will serve as an impetus catalyst for other redevelopments in the immediate district. Portfolio developers may seek to maximise the value and returns of their holdings in order to support growth of the high-end service sector, which tends to cluster around the banking and finance sectors. Wanchai North

13 Broader Hong Kong Commercial Space Master-plan Embraces CBD2 Development 13 Causeway Bay - the areas around Hysan Avenue and Times Square We believe existing portfolio developers could refurbish or redevelop existing buildings to satisfy the design and specification demands of traditional CBD occupiers, including larger and high tech floor plates. This cluster currently has 2.5 million sq ft net of space, with potential for both expansion and refurbishment. More importantly, lower grade buildings can be redeveloped to make way for high tech, large floor plate buildings that will support a supply-led expansion towards the east. The Wanchai Bypass will make this area more accessible by road transportation once traffic to and from other districts is diverted. With little green field opportunity, the government can otherwise support private developers with improved infrastructure and streetscape that will further enhance this locations business credentials. Causeway Bay provides significant opportunities for redevelopment which can accelerate the expansion of Central into this well-located district.

14 14 Advance COMMERCIAL ISSUE Hong Kong East the areas surrounding Quarry Bay and Taikoo Shing The relatively young age of the buildings in this location, and the potential of site amalgamation to build larger floor plate buildings, as well as the characteristics of dominant ownership structures combined to make this an ideal location for the investment banking and services sectors. The Wanchai Bypass will reduce travelling time to Central and the Airport Express, making Hong Kong East one of the best connected districts in Hong Kong. It also offers easy access to CBD2 in Kowloon East. The area s current Grade A office stock of 11.1 million sq ft net can be increased, with existing older stock ripe for either redevelopment or refurbishment. In our opinion, a number of existing portfolio landlords have the ability to redevelop existing buildings into much sought-after large floor plate buildings that would support a supply-led expansion of the CBD towards the east.

15 Broader Hong Kong Commercial Space Master-plan Embraces CBD2 Development 15 Again, in addition to the types of initiative mentioned earlier, the Government can support the development progress of Hong Kong East by facilitating the improvement of connectivity. Extension of the MTR walkway to connect with the commercial clusters and the waterfront promenade, enhancement of the already significant underground car parking provision and streetscape will improve the location s credentials as a core business district.

16 16 Advance COMMERCIAL ISSUE Significantly, portfolio landlords in the region have already invested heavily in these provisions which are within their control. If the Government can consider facilitating at least some of the above ideas, more portfolio landlords will likely consider enhancing their assets to secure higher returns, thereby advancing the development of Hong Kong East as a further extension of the CBD. Many of the amenities, connectivity and transportation links already exist in this location to support the types of front office CBD businesses located in Central. Hong Kong East

17 Broader Hong Kong Commercial Space Master-plan Embraces CBD2 Development 17 Brownfield Sites are Key to Our Commercial Future Only a certain number of the buildings within the above clusters need to be redeveloped to achieve the necessary results, as not all tenants are seeking larger floor plates and highly advanced building specifications. This is evident in locations such as London and New York, where newer, built-to-suit office buildings sits alongside older, refurbished space suitable for lower tech tenants. However, the catalyst to building further momentum in this direction will be the provision of a small number of new buildings through redevelopment of older stock that attract high specification real estate users, around which the remainder of the high-end business services typically cluster. In addition to the necessary focus on CBD2, the government needs to develop a master plan for the city s future commercial real estate landscape. Within this broader plan, incentives are required to encourage developers within the private sector to participate as partners in driving this change. The government can seriously consider introducing action areas and enterprise zones as locations within the above mentioned districts where encouragement and/or incentives are provided as a catalyst to advancing the development of the CBD. Bonus GFA for refurbishment or redevelopment in existing commercial districts, as well as within the CBD2 area is a possibility. This will further contribute in presenting Hong Kong to the international business community as a global business hub with a short, medium and long-term plan for its continued commercial development. Careful district planning that supports sustainable growth on Hong Kong Island and making the best use of potential development sites, such as the Wanchai Government Office complex, will contribute significantly to the short and long-term progress of Hong Kong. This facet of a wider plan for the cities commercial future will ensure that there is enough office supply to support a market that in 2010 absorbed 3.7 million sq ft of office supply for the growth of business. This is more than the total of new Grade A office supply in the following three years combined, not only in core locations, but across Hong Kong.

18 18 Advance COMMERCIAL ISSUE Conclusion Hong Kong is widely regarded as one of the three major finance capitals globally, alongside London and New York. To maintain this position, it will need to provide a platform from which the world s corporations are able to conduct business at a reasonable cost and in suitable premises, within an environment that appropriately accommodates staff. In what is the world s most competitive region, Hong Kong needs a plan to accommodate these corporations in appropriate locations with an appropriate level of support. In doing this, the city can and should also preserve many of the advantages that it holds over competitors in the region. Piecemeal development solutions cannot succeed, and a plan that does not promote confidence in the market will put the city s position at risk. Hong Kong needs an expanded CBD, as appropriately addressed by the Government s CBD2 plan, but in tandem with this a commercial supply pipeline that dovetails seamlessly with the other parts of its commercial landscape is imperative in order to guarantee continued success as a global financial capital. The further development of Hong Kong Island as suggested in this Paper, by means of a wider plan blending with the emergence of CBD2, should be targeted, to ensure that Hong Kong consolidates its position as home to organisations seeking a location with headquarters dealing with high-end and core business functions. These are the users that exist within Hong Kong s current role as a major business services centre, and which are of greatest value to the city. It is in this area that the Government should be focused, with other locations in the region already providing a variety of non-core and back office solutions. CBD2, within an all-encompassing plan for the evolution of Hong Kong s commercial landscape, provides both a shortterm and a long-term solution for Hong Kong to strengthen its competitiveness and maintain its position as a global financial centre.

19 Gavin Morgan (left) Deputy Managing Director and Head of Leasing, Hong Kong Gavin Morgan is the Deputy Managing Director and Head of Leasing at Jones Lang LaSalle in Hong Kong where he is also a ten year veteran of the real estate market. Gavin has also worked on behalf of a broad range of multinational corporations from the business sectors discussed in this paper. Marcos Chan (right) Head of Research, Greater Pearl River Delta marcos.chan@ap.jll.com Marcos joined Jones Lang LaSalle in 2000 and is currently the Head of Research for Greater Pearl River Delta. Directly reporting to the Head of Research for Asia Pacific, Marcos oversees a team of research analysts and consultants across Hong Kong, Macau and the Pearl River Delta. He is a key contributor to various research publications and is responsible for consultancy assignments within his region.

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