Looking at Singapore and Hong Kong, CHRIS ARCHIBOLD examines the factors which make office markets attractive to businesses
TO analyse how Singapore’s office market can differentiate itself against those in other major cities in the competition for investment, it is vital to understand how the markets are seen from the point of view of companies which occupy space in these cities.
The last few decades have seen a distinct move towards globalisation, in terms of the way many corporations do business. This has principally been driven by the need for growth and the need to remain competitive. One of the primary beneficiaries of this trend has been Asia-Pacific. Given the current financial uncertainty in the US and Europe, more and more businesses are looking towards Asia for both cost savings and revenue generation.
Singapore and Hong Kong have traditionally been the major cities attracting multinational companies (MNCs) into Asia-Pacific. They are also home to many corporate headquarters and representative offices for the region. Most pundits predict that the focus on Asia-Pacific is likely to grow in the future.
Given this likely growth, we have reviewed the main drivers behind locational decisions made by MNCs; how local office market dynamics have affected and will continue to affect this decision making process; what the broadly held perception of each market is in terms of locational advantages and disadvantages; and how this is likely to impact the office markets in these cities in the next few years.
Perhaps one of the most important factors that dictates locational decisions is the business environment, in terms of the transparency of the market place, the ease of doing business and the proximity to a core or growth market for a company’s products and services.
This is evident in the fact that Hong Kong and Singapore have been the locations of choice for such a long time. They are two of the easiest cities in the Asia-Pacific region in which to do business, have high levels of transparency and are core income producing markets for many industries.
With China’s continued opening up, the lure of being located close to what is potentially such a huge growth market gives Hong Kong a major advantage. That said, South-east Asian economies such as Indonesia are also growing and there is a lot of wealth creation in these markets. Singapore has always acted as a hub for South-east Asian economies.
One of the issues facing companies is the quality of life a city provides. Many MNCs consider factors such as pollution, residential accommodation, healthcare, education, retail, entertainment and other amenities when looking at the feasibility of a particular location.
Singapore and Hong Kong provide very different environments and they generally appeal to different age groups and cultures in different ways.
Having the correct infrastructure is also of paramount importance. MNCs typically need ready access to reliable power supplies, basic utilities, good quality IT and communication infrastructure and air travel. Hong Kong and Singapore have had such infrastructure in place for a number of years.
Business costs and human resources
Economic costs are fundamental to the decision making process of where to locate a business. Issues considered include the levels of taxation, incentive schemes on offer to set up new businesses, staff costs and occupancy costs (costs associated with providing office accommodation).
Staff remuneration forms one of the highest outflows for most companies across the globe and is therefore a high priority on the list of considerations. The availability of skilled and economic labour is a prime driver. Part of this is driven by the cost of living in each city and by the level of personal income tax.
Both Singapore and Hong Kong have low levels of corporate and personal taxes which make both attractive. Singapore’s office costs have historically been at a significant discount to costs in Hong Kong.
Real estate market
Overall, Hong Kong’s office market is significantly bigger than Singapore’s, at 115 million square feet versus 61 million sq ft. At other global financial centres, London’s office market is over 200 million sq ft and New York’s is over 400 million sq ft.
However, given that financial institutions and major MNCs are driving much of the job growth and therefore office space occupancy, it is more relevant to look at new highly specified developments with large floor plates (international standard Grade A) in the Central Business District (CBD) which these occupiers prefer.
Looking at just international standard Grade A CBD office space, Singapore has edged ahead of Hong Kong, with the latter having four million sq ft of space and Singapore having seven million sq ft.
Looking at the upcoming supply of international standard Grade A CBD office space, Singapore has another two million sq ft coming on-stream over the next four years, whereas Hong Kong has no real international standard Grade A supply in the core business district. Singapore’s major competitive advantage over other financial centres, including Hong Kong, is the plentiful supply of land in Marina Bay to build new office developments.
Hong Kong has traditionally seen higher rents than Singapore, but a lack of supply has been an additional factor behind sharper rental increases in Hong Kong in this cycle. Singapore’s office market bounced back from the financial crisis in 2008/2009 with Grade A CBD rents rebounding 20 per cent in 2010, and 7 per cent and 1.5 per cent in Q1 and Q2 of 2011 respectively.
Hong Kong has also bounced back, but at a sharper pace, with rents rising 28.5 per cent in 2010 and 8.1 per cent and 6.3 per cent in Q1 and Q2 of 2011 respectively.
Singapore’s CBD Grade A rents currently stand at S$10.15 psf with some premium developments trading at S$12-14 psf (including service charge).
In Hong Kong, Grade A Core Central rentals are around HK$120-130 psf or S$18.50-20 psf (including service charge), with some of the premium buildings trading at HK$160-170 psf or S$25-26 (including service charge).
Profile of major office occupiers
The bulk of Singapore’s GDP is made up of manufacturing, construction, wholesale and retail trade, transport and storage, financial services and business services, of which financial and business services form the major component of office space demand.
Jones Lang LaSalle has analysed Singapore’s largest 200 office occupiers by area occupied, and results show that financial occupiers make up 63 per cent of the largest occupiers by area. The same analysis for Hong Kong shows its largest occupiers are also from the financial services sector.
This is unsurprising given that both Singapore and Hong Kong are among the top four global financial centres along with London and New York. Singapore’s position in this is a relatively new phenomenon, with the Government focusing on the financial service industry as a job creator over the last 10 years. Singapore’s top 20 international financial institutions occupy 5.3 million sq ft of space which equate to an average occupancy of around 260,000 sq ft. The largest occupiers are predominantly European and US banks.
In Hong Kong, the top 20 international financial institutions occupy over nine million sq ft of space though this is skewed by a note-issuing bank that has an exceptionally large portfolio. With this occupier taken out of the analysis, the average occupancy is around 350,000 sq ft, which is slightly larger than Singapore’s.
When looking at the Singapore and Hong Kong markets, it is impossible to think that either one will not continue to grow and prosper for its own unique reasons.
Both cities are well developed to serve international corporations, thanks to their advanced and well-established accounting, banking and legal frameworks.
Both are major global financial hubs. The finance industry occupies more space than any other industry sector in both markets. Hong Kong and Singapore will continue to be the region’s two major financial centres serving their respective sub-regions in China and South-east Asia.
Hong Kong and Singapore have a long history of accommodating the most advanced MNCs. Hong Kong has developed a strong business network with mainland Chinese corporations over the past two decades, and its close proximity to China provides a major benefit. Singapore has a comparative advantage in language capability and supportive software (such as a better schooling and living environment, and less pollution, among others).
Singapore’s competitiveness continues to be driven by its excellent business environment, infrastructure and talent pool. From a real estate perspective, the availability of land to build new office space both in the CBD and in business parks and the pipeline of space under construction give Singapore a definite edge over Hong Kong, which has no new space in the CBD.
In terms of quality, the latest generation of buildings such as Asia Square, which provide high quality, efficient space in green environments, would stand up to scrutiny in any market around the world. The key to keeping Singapore competitive, from a real estate perspective, is to ensure that the development community is motivated to continue developing worldclass buildings that attract occupiers to Singapore. To do this, there needs to be a good balance between a reasonable return for the development community and a reasonable level of rent for occupiers.
Both Hong Kong and Singapore provide world leading business platforms. The question is not so much about how Singapore can differentiate itself against Hong Kong, but how Singapore and Hong Kong – as ambassador cities for Asia – can take advantage of current economic uncertainties in the US and Europe and take the competition with New York and London to the next level.
The writer is head of markets at Jones Lang LaSalle
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