HK$40B Site on Victoria Harbour Could Reshape Hong Kong’s Central

Amid market uncertainty and sliding property values, Hong Kong is putting up for sale an iconic commercial site in the city’s busiest district, according to a recent announcement by the city government.

The 4.76 hectare (512,362 square foot) waterfront plot, named New Central Harbourfront Site 3, is surrounded by some of the city’s most famous landmarks, including the Hong Kong Observation Wheel and the IFC complex to its west. Spanning from the Central Ferry Piers in the north to Jardine House in the south, the plot could be developed into about 150,000 square metres (1.6 million square feet) of gross floor area.

“The site is arguably the most significant waterfront site globally at this time in any major city,” said Trevor Vivian, Global Director of international architectural firm Benoy, “It therefore represents Hong Kong’s greatest opportunity to bring something special and globally recognizable to complete the waterfront along Central.”

According to Thomas Lam, head of valuation and advisory for Hong Kong at property consultancy Knight Frank, the site is currently valued at HK$40 billion ($5 billion). That price equates to around HK$25,000 to HK$28,000 ($3,225 to $3612) per square foot, or about 15 percent lower than estimates for the site at the end of 2019.

Developing the site could involve a total investment of up to HK$65 billion, however, developers may consider carefully before bidding on the plot, given current market conditions.

Tricky Timing

“Now is not the best time to launch such a commercial site in Hong Kong, considering this might be one of the most expensive commercial sites to be launched in the market in the past few years”, said Vincent Cheung, managing director of Vincorn Consulting and Appraisal Limited.

In the most recent previous sale of a major commercial site in Central, Henderson Land in 2017 agreed to pay HK$23.3 billion (then $3 billion) to purchase the Murray Road car park project. That land buy worked out to around HK$50,064 per square foot for the right to develop around 465,000 square feet of commercial space on the site.

Should Site 3 sell within the price range predicted by analysts, it would bring a price of nearly half the rate that the Murray Road parcel less than 1 kilometre (0.62 miles) inland of the harbourfront plot sold for three years ago.

A Changed Market

That variance in price may be explained in part by the current market condition and development constraints including height restriction and design parameters, said Knight Frank’s Thomas Lam. Those conditions include the need to provide postal facilities to replace the current post office that occupies part of the site, as well as requirement regarding construction of public space.

However, there have also been changes in demand and business confidence over the past three years that may have had an impact on the site’s value.

“The market today is in a much different place than it was back in mid-2017 at the time of the Murray Road carpark site sale, and that’s likely to affect what developers bid for site 3,” Reed Hatcher, head of research for Hong Kong at Cushman & Wakefield said. “Back in 2017, the market was red hot with the expansion of Mainland Chinese firms into Hong Kong propelling office prices to record highs. In contrast, the office investment market over the past year has turned much more subdued as US-China tensions, social unrest, and the Covid-19 outbreak have all contributed to an uncertain outlook over the near-term.”

Average office rents in the greater Central area have dropped around 8.7 percent from HK$126.7 per square foot in the second quarter of 2017 to HK$115.7 per square foot in the most recent three month period, according to Cushman & Wakefield. Vacancy in the business district has also been on the rise, climbing from just 3.3 percent in the period from April through June of 2017 to 9.1 percent in the second quarter of this year, the agency said.

With ongoing social unrest and the pandemic disrupting the economy, the retail market also took a hit as sales in May slumped by 32.8 percent year-over-year, marking the 16th consecutive month of decline.

Under such market conditions, Lam believes that if this site is successfully sold, it will boost confidence in the property market. “We estimate about 4 to 7 developers or consortia will submit bids for the site,” said Lam, “In addition to large domestic developers, large Mainland Chinese firms will also actively participate.”

Two-Envelope Tender

According to the Hong Kong government, the buyer of the site will be required to provide a large-scale public open space and a landscaped deck spanning the project to enhance pedestrian access to the Central Harbourfront.

A rare “two-envelope” approach will be adopted for the plot tender, giving both design and price proposals equal weight in evaluating the winning bid.

Last deployed in 2002 for the sale of the former Marine Police Headquarters at Tsim Sha Tsui, two-faceted approach is usually adopted in Hong Kong for iconic sites to ensure that the design of the project will benefit Hong Kong both economically and socially, according to the city government.

“For this unique site, it’s not just about money, it’s also about the importance of the site’s location,” said Nicholas Brooke, Asia Pacific Chairman of the nonprofit real estate research organization Urban Land Institute (ULI).

According to Benoy, advocates continue to push the government to give more than 50 percent weightage to design considerations in choosing a winning bid, with the final terms of the tender process yet to be released.

Building Something Memorable

“Obviously the government would like to see some highlights on the water from potential bidders,” said ULI’s Nicholas Brooke, “the bidders are also likely to integrate the site with the surrounding area to leverage its connectivity to the Exchange Square, IFC and etc.”

Winning designs could incorporate kids play areas, event spaces, landscape designs, art installations, which could make the waterfront more accessible to the public for cultural events, according to the firm. This envisages retail linked to the elevated walkway connecting central to the Star Ferry Pier with low rise office towers above.

“Hong Kong has a huge opportunity to deliver something great for the city on this site, which is memorable, and attractive to both residents and visitors,” said Benoy’s Vivian.