With
the record smashing office land sale last week in Central where both the lump
sum and unit price hit all-time highs (HK$23bn and HK$50,000 per square foot
respectively), it seems an opportune moment to look into the dynamics of
commercial land supply in Hong Kong.
As
can be seen in Chart 1 below, both
the office stock and retail space have been growing steadily in the past three
decades. However, one cannot fail to notice that the speed of growth in office
space has been outpacing that of retail consistently – this has led to the
office-retail stock ratio rising from 0.62x in 1981 to 1.04x in 2016 – a
massive outperformance of 69% over the entire period.
Chart 1: Gross floor area: office
has grown persistently faster than retail
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Last week’s record high office land sale price tag may be due to a combination of
factors, including an ultra-low interest rate environment, increasing demand
from China’s burgeoning corporate sector looking to expand overseas (via HK),
thereby pushing up rents and prices here.
However,
this could be said for retail space also, where ever rising PRC tourists should
have done the same to retail property demand, so why has office still raced ahead
in its stock build up, leaving retail in the dust?
Shifting consumption pattern: from goods to services
We
suspect that the faster growth in office inventory compared to retail space may
have something to do with the changing mix of the Hong Kong economy at large,
where a greater part of consumption is now undertaken in the form of services
rather than goods alone.
By
comparing service consumption dollar to retail dollar over the years, it
becomes apparent that services have grown significantly faster than retail –
from 0.9x of retail back in the 80s to around 2.5x in the noughties (X axis, Chart 2). Throughout this period, there seems to be a matching growth
in the ratio of office stock versus retail space (Y axis). Apart from a short period of volatility where the
service-retail ratio fell in the past 4-5 years (red oval), likely caused by a disproportionate explosion of
mainland visitor numbers, the relationship has held very neatly in a linear
fashion.
Chart 2: Stronger growth of
office stock driven by increasing share of service consumption
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Looking
more closely at the total consumption picture, we could see that the amount of
services related consumption, which is largely produced, if not also consumed
in office premises, has risen from 43% in 1981 to 60% now; over the same
period, the more retail space intensive items of Food and Consumer Goods have
seen their combined share drop from 58% to 47% (Table).
Table: Components and their weights
in private consumption
This
rising trend of services consumption can be visually represented in Chart 3 below, in fact, even the basket
of household expenditure used to survey inflation has also witnessed a general
drop in weighting for goods specific items (food, drinks, clothing and durable
goods – see purple line in Chart 4) over the years.
Chart 3: Services weighting in private
consumption in rising trend
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Chart 4: Services weighting of household
expenditure basket also rising
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From bricks and mortar to clicks and mortar
Another
new trend that has emerged in recent years is the exponential growth of online
retail (Chart 5), meaning that
increasing proportions of retail purchases may now be taking place in offices (eg
online sales handling by e-commerce staff) and industrial/warehouse spaces (which
supports the logistics of the online retail sales), this will obviously become
more important in influencing demand for both office and retail space in future.
Chart 5: Number of HK people employing
online purchasing for personal matters (mils)
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Why has office rent not outperformed retail then?
Given
the faster rising demand for services, one might ask, why then has office rent
not done significantly better than retail rent (Chart 6). The simple explanation could be that office stock has
grown faster than retail space at the same time, keeping the magnitude of
office rent increases in check.
A
more physical reason may be that office space can be stacked over many storeys
without affecting its utility, while retail premises require large pedestrian foot
traffic, convenient transport linkages, and high location visibility to be of
value to retailers. This explains why retail facilities in most multi-storey
commercial buildings are restricted to the lowest floors (often not more than
three).
Chart 6: Average office rent
still a fraction of retail rent (Kowloon, HK$psm/month)
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But
what of the future? Will office supply continue to outpace retail? Not
necessarily, for two reasons: 1) as the increase in PRC tourist arrivals
recover and potentially reach new highs, more specialty themed multi-storey
shopping malls may be built, or converted from office blocks, provided the
logistic issues of large foot traffic flows can be addressed; and 2) the new
trends in mobile working and hot desking could reduce the need for office space
at a per-worker level (e.g. some organisations expect >10% utilisation
improvements in their office space by moving towards a hot-desking/co-location
model), not to mention the emerging phenomenon of robo-workers and their threat
to white collar professions.
Whatever
the future holds, Hong Kong remains a hub of regional activity for both office
and retail, and will only benefit from further above-average growths of the
Asian economies. In that regard, both subsectors should see trend
outperformance compared to other global office/retail hubs in more mature cities.
With special thanks to Miss Rhonda
Zixuan Lai (賴子萱) for her
contribution to this article.
