Has Hong Kong Reached Its \'Tipping Point\' as a World Center?

HONG KONG - With home prices at record highs, and retail and office rents topping those in New York, Tokyo and London, it was, perhaps, only a matter of time before someone sounded the alarm that Hong Kong is now too crowded and expensive for its own good.

Hong Kong's standing as a key location within Asia is “under threat,” said Craig Shute, senior managing director for Hong Kong, Macau and Taiwan at the real estate services firm CBRE. “We have reached a tipping point.”

The stark warning was referring to the worsening shortfall of office space in the city, which has driven rents to stratospheric levels, sent vacancy rates to record lows (despite the shrinking workforces in the finance sector), and prompted some companies to mull alternatives.

International business is the lifeblood of this Asian trading and financial center, so this is serious stuff. In Mr. Shute's opinion, Hong Kong's long-term prosperity could be “in danger” unless more is done to beef up the supply of space. And fast.

As I explained in this recent story, an influx of cash from mainland China along with overseas companies that want a base at China's doorstep have helped push property prices and rents ever higher.

Office space in the main business district of Central, for example, is by far the most expensive in the world, according to a CBRE report. Rents in Kowloon, across Victoria Harbor, are lower than on Hong Kong island, but they're still pricier than in the City of London.

Some companies have responded by squeezing more people into the space they have. Others are moving to less desirable parts of the city.

An upscale restaurant called Culinart took up residency earlier this year in a somewhat down-at-the-heels industrial building in Wong Chuk Hang, an anything-but-fashionable neighborhood that is not on Hong Kong's efficient subway system. An art gallery in Central will soon head to Wong Chuk Hang, too. The downto wn area, the gallery's founder, Meg Maggio, told the Hong Kong Trade Development Council, has become “too expensive.”

But even companies prepared to pay top dollar for prime space are hitting a buffer: There is simply not enough space available.

In a report published last week, CBRE and Daiwa Capital Markets estimated that projects currently in the pipeline will add 8 million square feet of Grade A office space by 2020, or about 743,000 square meters - less than half what will be needed (based on current projections of economic growth) by the end of the decade. The shortfall could be relieved by accelerating some developments, but even that would take time and money.

Moreover, said Mr. Shute, the “crisis of supply” extends to other areas, too - residential property, retail space, hospital beds, school spaces. Hong Kong's airport, too, will soon max out if air traffic keeps growing the way it has been.

The shortage of school spaces, in particul ar, has become a major problem for expatriates with kids - and for the companies that want to base them in Hong Kong.

“The crunch for space in Hong Kong's international primary schools is a near constant complaint in my circle of young expat families,” Kate Malin, editor-in-chief at Sassy Media Group, wrote in an e-mail to me.

To be sure, Hong Kong still exerts a strong magnetism, and the number of foreign companies with a presence here is at an all-time high, according to InvestHK, a government body that works to attract foreign investment.

Leaving outright or moving individual teams or back-office functions to less pricey cities is not an option for many companies and organizations. Similarly, retailers who want to cater to the many mainland Chinese who flock to Hong Kong every month have no choice but to pay the excruciating rents that landlords are demanding.

So we're not talking about an imminent mass exodus. As Nick Axford, head of Asia Pac ific research at CBRE puts it: “It's not about businesses upping and leaving Hong Kong.”

But Mr. Axford and his colleagues say the pressures and costs of being in Hong Kong are now increasingly prompting companies to think very seriously about how to lower their cost bases.

It's gradual, below-the-radar stuff -a relocation here and there, perhaps, or decisions to bolster teams in other parts of Asia - but it could certainly intensify if the pressures on space do not ease up.