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
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
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'
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
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
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.
All rights reserved.