Hong Kong's tallest building, a HK$19.5 billion, 88-storey addition to

the skyline, is nearing completion at the worst possible time: rents

are at 15-year lows and the city has never had so many empty offices.

Two International Finance Centre, part of a complex that includes a

shopping mall and a Four Seasons Hotel, is due to be finished next

month.

Owners Sun Hung Kai Properties, Henderson Land Development, Bank of

China Group Investment and MTR Corp may have to cut their prices or

wait up to three years for tenants, consultants say.

"The greatest pressure in Central is the completion of Two IFC,"

said Piers Brunner, managing director of Colliers International in

Hong Kong. "We predict a fall of 20 per cent in office rentals over

the course of the next 12 months."

Two IFC highlights the problems facing property developers. Two

recessions in five years and the recent Sars epidemic have pushed

unemployment and office vacancies to record highs, forcing developers

to slash rents to lure tenants.

Average office rents in Central have tumbled to about HK$21 per square

foot levels not seen for 15 years from a high of HK$71 in 1997.

Shares of Sun Hung Kai, which owns 47.5 per cent of the development,

have slid 9.3 per cent this year. That makes Hong Kong's biggest

developer by sales the worst performer in the six-member Hang Seng

property index. Sun Hung Kai shares closed up 2.42 per cent at

HK$42.30 yesterday.

Henderson Land took a 32.5 per cent stake in the project and its Hong

Kong and China Gas unit owns 15 per cent. Bank of China's investment

unit holds 5 per cent.

Many analysts say that if the new building lures tenants, it will be

at the expense of other landlords in Central.

"Two IFC is a new building and will be perceived as the best in

town," Insignia Brooke Hong Kong consultant Nicholas Brooke said.

The Hong Kong Monetary Authority will leave 200,000 square feet at

Great Eagle Holdings' Citibank Plaza to expand into the new tower's

top 14 floors, which it bought in 2001 for HK$3.69 billion. Each floor

is equal to about 20,000 square feet.

It will be joined by the Hong Kong Mortgage Corp, which plans to

vacate 20,000 sq ft at Gloucester Tower in Hongkong Land Holdings'

Landmark complex.

Its departure comes as Hongkong Land still tries to fill about a third

of the 430,000 sq ft of prime office space at Chater House, which was

completed last year.

Nomura International (Hong Kong) has agreed to take 60,000 sq ft at

Two IFC. It is also leaving Great Eagle's Citibank Plaza. The

Financial Times, a tenant at One IFC, has committed itself to 10,000

sq ft.

Sun Hung Kai and Henderson Land own 39 floors in Two IFC.

"If Sun Hung Kai cuts rents aggressively, it will hurt other

landlords because they will have to match the rent cut to retain

tenants," said Anthony Wu, the head of Hong Kong and China property

research at Lehman Brothers Asia.

Shares of Singapore-listed Hongkong Land have fallen 5 per cent this

year, while Great Eagle has dropped 8 per cent. That compares with a

7.3 per cent gain in the Hang Seng Index.

Officials at Sun Hung Kai and MTR Corp declined to comment on the

impact of Two IFC on rents or the prospects of finding tenants.

Officials of Henderson Land and Hong Kong and China Gas did not return

calls.

One IFC, whose costs were not disclosed, and Two IFC, which analysts

estimate is a US$2.5 billion project, were conceived when the Hong

Kong economy was growing at 4 to 5 per cent a year, the stock market

was heading toward its 1997 record high almost double its current

level and businesses saw the city as a springboard into China.

In 1996, Sun Hung Kai and its partners outbid other developers,

including Cheung Kong (Holdings) and New World Development, paying

HK$5.5 billion to the government for the right to build the city's

most expensive commercial project.

The deal also required them to give 18 floors to MTR Corp.

One IFC, now joined to its sister building by walkways, malls and the

separate hotel tower, opened in December 1998, at the tail end of the

Asian financial crisis.

It had less trouble drawing tenants, among them ING Bank, Sumitomo

Mitsui Banking Corp, Fidelity Investments and the Mandatory Provident

Fund Schemes Authority. "The market had turned for the better in the

second half of 1999 and they were able to virtually let out the entire

One IFC within a year," South China Research analyst Jeff Yau said.

"The problem now is that there is zero new demand in the market and

the new supply at Two IFC will push the falling rents even lower."

Whatever happens, Hong Kong developers are still thinking big. MTR

Corp and Sun Hung Kai are already planning Hong Kong's next "tallest

tower" a 102-storey, 580-metre building that will rise above

Kowloon Station, facing Two IFC across Victoria Harbour.

They say it is due for completion in 2008.

Bloomberg

All rights reserved.