Henderson Land Development has agreed to pay a record HK$50.8 billion ($6.5 billion) for a harbourfront site in Hong Kong, with the successful government land sale coming as confidence returns to the world’s most expensive real estate market.
The developer controlled by the family of billionaire Lee Shau-kee now has the 50-year land grant for the site adjoining the IFC complex in Central and with it the rights to develop some 1.6 million square feet (148,645 square metres) of commercial space, plus additional community areas, in Hong Kong’s traditional downtown core.
The bid for the site, which leads to the city’s famed Star Ferry, exceeded analyst expectations and sees Henderson repeat its role as the most aggressive buyer in Central after the developer paid HK$23.3 billion in 2017 to make a car park on nearby Murray Road Hong Kong’s priciest piece of land.
“This is a historic record high lump sum for a single development site in HK, and a mega sum from any investment perspective,” Rita Wong, head of valuation and consulting for Greater China at CBRE said of the tender result. “The financial outcome is on the mid-upper end of the market expectations band of HK$35 to HK$66 billion.”
Henderson, which triumphed over five competing bids for the 516,312 square foot site, was required to submit both a financial offer and a separate design proposal under a “two-envelope” tender process intended to allow city leaders to ensure both maximum revenue and a landmark development.
“Coupled with its prime harbourfront location, the integrated development will benefit Hong Kong both economically and socially,” a government spokesperson said in an official announcement today. “The Government hopes that this project can optimise development space by providing the maximum possible commercial floor space to address the city’s strong demand for prime Grade A offices, while creating a world-class harbourfront with quality public open space and pedestrian-oriented connectivity.”
In a statement late yesterday, Henderson Land shared a vision of the Site 3 development which is largely in line with the government’s objectives.
The Company is optimistic of the long term prospect of this world-class development, which will form one of the most important and strategic additions to Hong Kong’s Central Business District,” the statement from Henderson’s board read. “The investment is expected to create not only one of Hong Kong’s most iconic landmarks but also a social destination dedicated to public enjoyment along the harbourfront promenade.”
Henderson has appointed Wong & Ouyang as project architect for its site 3 development and selected Lead8 as design architect.
The project has been widely anticipated in a city where public space is limited and Central district has faced criticism for its unwelcoming built environment.
“This site truly is a once-in-a-lifetime destination, strengthening Hong Kong’s unique role as the international gateway to Greater China,” Terence Seah, head of Hong Kong, Singapore and Shenzhen for global design firm Benoy told Mingtiandi.
“More importantly it’s a great opportunity for Hong Kong to once again project its ability to innovate and demonstrate how the synergistic relationship between public realm, placemaking, the environment and commerciality in a post-pandemic world can truly bequeath a new form of vibrancy and possibility,” Seah added.
Site 3, as the project is commonly referred to, is subject to height restrictions which limit the project to 50 metres in height at the western side, and 16 metres on its eastern side, forcing the developer to build a more horizontal complex, with the structure also required to bridge roads running through the plot.
500,000 square feet in the project are set aside for offices, with the remainder of the commercial element to be used for retail and public areas. In addition to the leasable area, Henderson will be required to provide at least 269,000 square feet of public space.
While noting that the chosen scheme differed from concepts presented by some groups interested in the project, Seah found some promise in the winning design proposal.
“There are some positives of the scheme which seeks to multiply ground planes into a multi-tiered experience of a sky park, platform and ground,” Seah said. “Especially in the inter-relation of these three planes, how people can move seamlessly between them and more importantly how retail, F&B experiences, a more differentiated and human-scale (of different propositions and use types) public amenities and public realm intertwine and co-exists harmoniously.”
Belief in the Market
At the land premium offered, Henderson is paying the equivalent of around HK$31,750 per square foot of commercial area in the project, which the government had struggled to bring to market as the city was hit by protests in 2019 and then hobbled by the pandemic from early last year.
“Considering the challenges on construction due to three separate sites, longer development period, significant public space contribution, the development cost is expected to be tremendous,” Hannah Jeong, head of valuation and advisory services for Colliers International in Hong Kong. The previous record price for a commercial site in Hong Kong was set in 2019 when Sun Hung Kai acquired a plot above the West Kowloon rail terminus for HK$42.23 billion.
The record price comes despite a commercial real estate which is struggling to regain its footing, and estimates of the site’s value having fallen to around HK$40 billion one year ago.
“Central’s Grade A office rents dropped 3.3 percent in the first seven months of 2021 and recorded rental growth for two consecutive months beginning in August, with a total growth of 0.7 percent to HKD 90.3 per square foot in September,” said Alkan Au, senior director of valuation and advisory services at JLL in Hong Kong.
Au interprets the recent uptick as a positive sign, coming after Central’s dominant landlord, Hongkong Land saw rents in its blue-chip office portfolio fall to an average of HK$118 per square foot by the end of June. That figure was down from HK$121 per square foot at the same interval last year, and during that same period vacancy in its Central office properties also crept up to 6.4 percent.
The changing nature of Hong Kong’s office market and the nature of its existing stock of buildings could provide an opening for Henderson, however.
“This development will be a new home for many Chinese banks and MNCs,” Colliers Jeong said. As many buildings are getting aged, this development will offer good relocation opportunities once it is completed in 5 to 10 years time.
Henderson Builds Central Portfolio
Acquiring Site 3 puts Henderson Land in position to become the second largest commercial landlord in Central, which continues to dominate Hong Kong’s office market despite recent defections by banks and other top institutions to more affordable locations in the city.
The company is already part owner of the nearly 2 million square foot IFC development in Central after joining Sun Hung Kai to develop that office and retail project more than two decades ago.
Henderson’s purchase of the former Murray Road complex in 2017 was the most recent previous commercial land sale in Central with the company having since developed that site into a 36-storey office tower set to open in 2023.
The Henderson, as the project has been named, will add 43.200 square feet to the developer’s Central portfolio, with auction house Christie’s having earlier this year committed to leasing 50,000 square feet across four floors of the tower.