China firms replace banks to drive Hong Kong rents

The Four Seasons hotel, from left, Two International Finance Centre (IFC), One International Finance Centre, and Exchange Square stand in the business district of Central in Hong Kong

Chinese brokerages and asset management firms are underpinning Hong Kong office rents as the city cements its financial-market ties to the world’s second-largest economy.
Prime office space leased by financial companies north of the border was 148,000 square feet last year, a 51 percent jump from 2013, according to data from realtor CBRE Group Inc. Industrial Securities Co., a brokerage based in Fuzhou city in eastern China, and Sino Life Insurance Co. are among those that have rented new offices in Hong Kong’s Central business district in the last two quarters, CBRE said.
Chinese firms are expanding in the city as Hong Kong connected its stock exchange with Shanghai in November and is expected to replicate the link with Shenzhen’s bourse later this year in a push by China to globalize its markets. They are also propping up the world’s costliest office market after London as some foreign banks including Standard Chartered Plc and Barclays Plc scale back unprofitable businesses.
“Chinese financial services companies are eager to expand here because they see Hong Kong as a perfect springboard for their internationalization,” Ricky Lau, the head of office leasing at Savills Plc in Hong Kong, said in an interview. “Hong Kong’s stock market is robust and active. That also attracts Chinese brokerages.”
Overall rents this year are expected to rise 5 percent, compared with 0.2 percent growth in 2014 and a 1.6 percent decline in 2013, according to CBRE.
Hong Kong’s Chief Executive Leung Chun-ying said at a Feb. 9 forum he hopes the bourse link with Shenzhen will begin in the second half of this year. Like the Hong Kong-Shanghai connect, it will allow foreigners to invest in China’s equities and Chinese investors a route to buy Hong Kong stocks.
“A lot of mainland banks and brokerages still don’t have branches in Hong Kong, or they only make up a small portion of the business,” said Marcos Chan, CBRE’s head of Hong Kong research. “Those in securities trading and wealth management will gradually start to position themselves in Hong Kong” as links extend to other markets including commodities, he said.
China is also studying connecting its bond market with Hong Kong, the South China Morning Post reported on Feb. 10.
The average value of shares changing hands on the Hong Kong bourse climbed 18 percent to HK$72 billion (USD9.3 billion) in the past 12 months from a year earlier, according to data compiled by Bloomberg.
London’s West End has the world’s most expensive office rents at $274 a square foot a year, followed by $251 a square foot in Hong Kong’s Central and $198 per square foot on Beijing’s Finance Street, according to a CBRE survey.
Chinese firms looking to establish Hong Kong offices are willing to pay a premium of 5 percent for a good location, according to Lau of Savills, they are opting for smaller spaces.
They are mostly seeking new offices under 10,000 square feet as vacancy rates in prime Central buildings remain low, according to Jones Lang LaSalle. They accounted for 28 percent of all new lettings in Central last year, the realtor said.
“The demand is healthy, but they’re not scrambling for the space,” said Paul Yien, regional director of markets at Jones Lang LaSalle. “They might renew and expand by another 3,000 to 4,000 square feet. It’s not massive growth.”
Industrial Securities rented a whole floor in the AIA Central building, while Shenzhen-based insurer Sino Life leased 6,200 square feet of net floor area in Two International Finance Centre, according to CBRE. Two IFC, the second-tallest skyscraper in the city, is home to the Hong Kong Monetary Authority and UBS Group AG.
China Re Asset Management Co., a unit of Beijing-based China Reinsurance Group Corp., leased 5,000 square foot at Three Exchange Square in Central, according to Savills.
Everbright Securities Co., the brokerage that’s seeking to purchase Hong Kong-based Sun Hung Kai Financial Ltd., expanded its offices at Far East Finance Centre in the Admiralty district, paying as much as HK$80 a square foot, a person with knowledge of the transaction said. Average rents in Admiralty and Far East Finance Centre are HK$50 to HK$60 per square foot.
High rents are a concern for Haitong International Securities Group Ltd., which said it wants to hire some people dismissed by global banks.
“We will utilize our existing offices before considering expanding,” spokeswoman Mimzy Si said by phone. “We could consider getting more space if the rent is attractive.” Michelle Yun and Vinicy Chan,  Bloomberg