Rival Asian cities Hong Kong and Singapore are consistently ranked among the most competitive globally. Both are regional gateways with highly evolved institutions that have laid a foundation for the development of talent and business acumen.

Differential impact of financials on the office market

One need only take a look at the signage in Marina Bay or Central to understand just how important financial corporates are to both markets. But recently the financial sector has had a differential impact on the two cities due to one key factor: Mainland Chinese financials.

In order to facilitate access to foreign markets and capital, the number of mainland Chinese financials setting up in Hong Kong has grown considerably in recent quarters – and they have a strong preference for high-profile buildings in Central. Examples from 3Q16 include Oriental Asset Management’s lease of 20,000 sq ft and China Huarong Asset Management’s lease of 22,000 sq ft. Mainland financials have contributed to Hong Kong’s historically low vacancy rates and supported gross leasing volumes.

Mainland financials have also helped drive Hong Kong net effective rents up 17% since 1Q15 (see Figure 1), some of the strongest rental growth in Asia Pacific over that time. Meanwhile, weakness in the global economy has weighed heavily on take up of space by financial companies based in Singapore. According to the Ministry of Manpower, financials have been hiring at a slower rate and growth in the number of work permits for foreigners is near zero. Coupled with a supply boom in the office sector, slowing demand from financials has contributed to a steady decline in Singapore rents which are down 19% since 1Q15.

Figure 1: Office Rental Index
Source: JLL Research

Different Stages of the Cycle

It’s clear these two cities are at different stages of the rental cycle. Moreover, they may be progressing to successive stages in their respective cycles. There are signs that Hong Kong office leasing demand is already weakening and rent growth may slow. Conversely, as supply is absorbed in Singapore, rents will bottom out and then begin to recover.

As both markets have sound fundamentals, investors with a long-term view will be able to justify a purchase at different stages of the cycle. Evidence in Singapore can be found in the recent Asia Square transaction, which was purchased for a record USD 2.5 billion (SGD 3.4 billion). Not to be outdone, Hong Kong may soon take that record. Li Ka-shing’s Cheung Kong recently put a large portion of The Center on the block and is reportedly asking a cool USD 4.5 billion (HKD 35 billion). But regardless of who holds what record, these two key Asia Pacific occupier and investment markets will perform over the medium to long term. The competition between them adds to the region’s dynamism and provides exciting statistics for real estate enthusiasts and investors alike.

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