Shenzhen’s rising costs boost office demand in Hong Kong as local firms return home
- Growing number of small to mid-sized firms has ceased operations in Shenzhen in the past 12 months
- Each firm is vacating between 2,000 to 8,000 sq ft of floor area
A question that was often asked in the 1990s is now increasingly being discussed by tenants.
At that time, Hong Kong companies had begun to venture into mainland China, choosing Shanghai and Beijing as strategic pathways into East and North China respectively, and benefiting from the two cities’ fast development. Shenzhen was also an attractive option, but for different reasons. With lower rents and labour costs, as well as easy access to Hong Kong, the southern Chinese city drew companies that sought to lower their operating costs.
However, in the last two to three years, Shenzhen has lost its lustre as rapid economic development on the mainland pushed rents and labour costs up to levels that are almost comparable to those in Hong Kong.
For the last 12 months, a growing number of Shenzhen-based Hong Kong companies are packing up and heading home. At this point, they have been mainly small and medium-sized firms that ceased their leases and vacated floor areas in Shenzhen of anything between 2,000 to 8,000 square feet. Some bigger companies have followed suit, with more expected to follow if the trend continues to gather steam. Whether the trend will continue is uncertain as the Greater Bay Area is forming a counter-force to attract companies to move to Shenzhen.
Currently, rents in Hong Kong and Shenzhen are not significantly different.
Grade A office rent in decentralised Kowloon and Grade B office buildings in centralised Kowloon are currently asking for HK$24 to HK$28 per sq ft and HK$29 to HK$38 per sq ft respectively, while Shenzhen Grade A office rent sits at around HK$25-30 per sq ft.
Whether that trend will continue is uncertain as the Greater Bay Area is forming a counter-force to attract companies to move to Shenzhen
Labour costs tell a similar story. Over the last 15 years, Shenzhen’s minimum wage has risen more than 200 per cent, and in 2017, the Human Resources and Social Security Bureau reported that the average monthly income of 240,000 workers across 959 companies surveyed had reached 5,611 yuan (US$807). With mainland tax considerations, operating expenses of the two cities have drawn almost to parity.
Looking forward, Hong Kong companies in Shanghai and Beijing will stay put for their strategic locations and to exploit potential benefits from the Belt and Road Initiative. But those in Shenzhen are generally evaluating deeper to ascertain if returning to Hong Kong was a better option to optimise costs. Furthermore, the US-China trade war will serve to bolster the situation, particularly for companies in the most affected industries, namely shipping, logistics and sourcing, among others.
Though the return to Hong Kong has not suggested a massive landscape change, companies that now move to Shenzhen are doing so for different reasons, compared with before. Shenzhen will be viewed as a strategic location, with potential benefits from its proximity to the Greater Bay Area development as the focus.
To date, Lo Wu, traditionally an attractive area for office operations, has seen the greatest outflow, while Futian and Nanshan areas in the west have become the new hot spots for incoming Hong Kong companies.
In the past nine months, we have been working with returning companies for office leases exceeding 25,000 sq ft, or 1.4 per cent of Hong Kong’s annual average demand of 1.8 million sq ft. Most companies, as we noted, have chosen smaller premises, compared with what they had in Shenzhen.
These companies, mostly from cost-conscious sectors of sourcing, electronics and logistics have also tended to avoid the premium office market in search of affordable rents. This suggests stronger demand in decentralised areas, like Kowloon Bay and Kwun Tong, and also points to revitalised industrial buildings as being another potential beneficiary of the trend.
Patrick Mak is head of Kowloon office services at Knight Frank
