The Government is looking at an upgrade in the city’s office property market in a bid to develop the central business district. Building Grade A office space is the way forward, but it may turn out to be little more than a baby step if not followed by additional policy support.
The Macau gaming industry has long been a believer of the “if you build it, they will come” philosophy with the development of multi-billion resorts along the Cotai Strip over the past decade and more. Despite cyclical ups and downs, this belief has been proven right as the city has become a major global gaming enclave.
But could this belief be proven right once again if it applies to the office market? Will building more prime office space in the city successfully entice more companies, particularly mainland Chinese enterprises, to set up operations here? Or is creating a vibrant business scene here more complicated than this?
In his maiden Policy Address unveiled in April, Chief Executive Ho Iat Seng said that one of the tasks for the authorities this year is to strengthen its efforts in attracting new investments and companies. “The tax regime in Macau is simple with low taxation, a reason that quite a many investors want to come to Macau,” the official noted at the time. “Some Mainland Chinese companies want to set up headquarters here.”
Mr. Ho continued that the city lacks Grade A office space and many office towers in the city’s downtown do not match prime office standards. “Macau has to upgrade its office facilities and amenities in order to retain large companies and to develop a central business district,” he said, adding that the government will consider undertaking land sales in the future for building prime office towers.
According to the estimates by local property agencies, the size of office space in Macau totals over 12 million square feet, and the office properties are scattered across the territory with most major buildings primarily located in the city’s downtown, namely Nam Van and Nape districts. A local office market report by property consultancy and agency Savills (Macau) Ltd noted there were about 35 major office and commercial buildings in these two districts as of last year, providing about 6,600 units in 6.5 million square feet.
Among these towers, only four buildings in Nam Van could be regarded as Grade A office space, including the 24-storey Finance and IT Centre (FIT), the 23-floor Fortuna Business Centre (FBC), the AIA Tower, and the Bank of China (BOC) Building. But the BOC Building, the tallest office tower in Macau with over 500,000 square feet in 38 floors, has been mostly reserved for the operations of BOC Macau and government bodies.
“Like what the Chief Executive says, the facilities in most office towers in Macau are dated,” says Gregory Ku Ka Ho, managing director of Jones Lang LaSalle Macau (JLL Macau). “If the standards of Grade A office buildings in Hong Kong are adopted here, no buildings here could possibly match the standards.”
As there has not been new office supply in the city for some years, the managing director sees a robust demand for new Grade A office space here. Market sources noted there were only three new major office towers inaugurated in the past 12 years, namely FBC, FIT and the Macau Daily News Building that is not open for public leasing.
Mr. Ku, however, notes his firm has received enquiries from several mainland Chinese companies in the past, which were interested in setting up headquarters in Macau. To attract firms setting up operations and thus develop a central business district in Macau, a low taxation regime and available office space are only some factors the government has to mull over. “There are other considerations, including the development prospects of certain industries, living environment, manpower policies, education, a healthcare system and others,” he says.
As the government aims to develop new offices for public bodies in the reclaimed Zone B, one of the five new reclaimed zones in the city, Mr. Ku says the authorities could develop a central business district incorporating reclaimed Zone B, and the existing Nape and Nam Van districts. There are a number of idle land plots in Nam Van Zones C and D the government has seized back in recent years that could be turned into office towers, as well as available land parcels in the new reclaimed zones, he details.
“The government could hold a public auction for one or two land plots zoned for the development of Grade A office buildings in the beginning to test the waters,” he adds.
Since the establishment of Macau SAR, only three land plots have been granted to private companies via public auction with the last time dating back to 2008 referring to two land parcels in Fai Chi Kei. The enforcement of the revised Land Law in 2014 has paved the way for the territory to establish a more transparent, open and regular mechanism for public land sales, but the administration only came up with the relevant land bidding regulations five years later. As of now, there is still not any confirmed land sale programme and timetable.
While acknowledging there is a need for new office space and facilities in the city, Franco Liu, managing director of Savills Macau, questions whether the demand at the moment is enough to fill up potential new Grade A office towers. “There are still quite a number of empty units in the existing Grade A office buildings, for instance, the vacancy rate at FIT is over 20 percent,” he says. According to both Savills Macau and JJL Macau, the vacancy rate of all office properties in the city range between 7 percent and 8 percent.
“It’s clear the government hopes to develop a business district here but the reality is there is not a vibrant business scene here yet,” Mr. Liu continues. “So it’s difficult to foresee how much more office space, particularly Grade A office space, Macau needs — this depends on the effective policy support and the scale of a business district the government has in mind.”
In a bid to diversify the local economy from gaming, Macau and Central Government have proposed in recent years for the city to further develop its financial industry. For instance, the Outline Development Plan for the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) published by Central Government last year pinpointed that Macau should position itself as the financial service platform between China and Portuguese speaking countries, and a yuan clearing centre for the Lusophone bloc, as well as mull over the possibilities of setting up a yuan denominated equity exchange.
“The development of a business district requires time and an array of policy support. Look at Hong Kong, it takes 50 years to become what it is now, and it has taken Shenzhen over three decades for development,” says Mr. Liu, referring to the two financial hubs in the Greater Bay Area (GBA). In short, he believes that should Macau increase office supply in the next few years, those new units might not be filled promptly as it takes more than hardware for the city to attract large corporations.
Cooperation with Hengqin
Taking nearby Hengqin of Zhuhai as an example, the managing director notes: “Many new office buildings have been inaugurated in the central business district of Hengqin in the past few years but many have remained vacant as of now. It’s just like a ghost city as it still needs more time and policy support to attract companies.”
The total size of newly established office space in Hengqin at the moment totals about 25 million square feet, and it is expected that over 8 million square feet of additional office space is in the pipeline this year, the property industry forecasts. According to the GBA Grade A office report by Savills China, the relevant supply in Zhuhai totalled less than 1.5 million square metres, or over 16.14 million square feet, by the end of last year. But the vacancy rate amounted to 34.1 percent, the second highest in the Greater Bay Area, mainly due to the unoccupied stock in Hengqin, the report noted.
Given the vicinity and the government’s push for further collaboration, Mr. Liu thinks Macau could work with Hengqin to develop a central business district. “Some local companies have already moved their back offices to Hengqin because the rents are cheaper and it is also easier for them to find manpower,” he remarks. The office rents in new projects on the nearby island could fetch between RMB100-130 a square metre (MOP10.89-MOP14.2 a square foot), compared with about MOP25 (US$3.13) a square foot for Grade B office or lower in Macau and MOP30-35 for Grade A office here.
“Persistently, the gap in total occupancy costs between Hong Kong and Macau, and the mainland cities [in GBA] remained significant albeit rental decreases were predominant in most cities,” Savills China noted in the GBA report. “This enticed some cost sensitive enterprises from Hong Kong and Macau to relocate their back offices to or establish new branch offices in the mainland cities, especially those enjoying the combined advantages of effective policy support, improved transportation accessibility, relatively low human resource costs, and a sophisticated business environment, such as Guangzhou, Shenzhen and Zhuhai.”
“In an ideal situation, Macau could be a hub for banks, law firms and operations for some top 500 companies in the world, while Hengqin could accommodate the back-of-house operations of these enterprises and others,” Mr. Liu envisions.
Third most expensive office market in China
Macau boasts the third most expensive cost for renting Grade A office space in China, property consultancy and agency Savills China noted.
According to Savills’ latest Guangdong-Hong Kong-Macau Greater Bay Area (GBA) Grade A Office Index report, it costs companies and individuals RMB324.8 (MOP365.37) a square metre to rent a Grade A office unit in Macau as of end-2019, including RMB295.4 a square metre for rents and RMB29.4 a square metre for management fees.
This price level was “the third highest among all the major Chinese cities after Hong Kong and Beijing and the second within the GBA [Guangdong-Hong Kong-Macau Greater Bay Area]”, the consultancy noted. The cost in Hong Kong fetched RMB866 a square metre, RMB397.9 a square metre for Beijing, and RMB305.4 a square metre for Shanghai.
“Macau continued to be in the late upswing market cycle due to its limited supply and relatively stable asset performance,” the agency continued, when other cities in the Greater Bay Area were in the stage of either early downswing or late downswing.
Grade A Office Requirements
Though the standards for prime office space vary across different districts, property consultancy and agency Savills Hong Kong sum up the following requirements for Grade A office space in the Asian financial centre:
- Modern with high-quality finishes
- Flexible layout
- Large floorplates
- Spacious, well decorated lobbies and circulation areas
- Effective central air-conditioning
- Good lift services zoned for passengers and goods deliveries
- Professional management
- Parking facilities