Hong Kong The Worlds Leading Financial Centres Commerce Essay

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Hong Kong is one of the worlds leading financial centres, it is an important centre for international finance and trade, with the greatest concentration of corporate headquarters in the Asia-Pacific region. Hong Kong transformed from manufacture-based industries to finance-based activities since the mid-1970s because China adopted the Open-Door Policy. Hong Kong becomes the entrepot of China where there are a lot of headquarters of foreign corporate.

Strong functional linkages between business organizations are important for their daily operation as business contacts are usually concentrated. There is no doubt that the city centre with well developed transportation facilities and prominence is always favoured by the business organizations. So, CBDs are usually located at those city centres.

Except the economic downturn during 2000 - 2006, the demand of CBD Grade-A offices has been increasing in the last two decades. It is also expected the trend of increasing demand of CBD Grade-A offices would still go on. In gist, the demand for CBD Grade-A offices from 2003 to 2030 is projected to increase from 4.1 to 6.7 million m2 in gross floor area (GFA), representing a net increase of 2.6 million m2.

Even if the rent of office in CBD is high due to its advantages, the competition for offices in CBD is still high. So, some office activities which do not rely on the communication networks in CBD will choose to leave the CBD because they can enjoy the lower rent in those areas. Finally, as more and more office activities leave from the CBD, they form districts for clustering which become the secondary business districts.

The movement of office activities become more frequently and concentrated which depart from the area CBD lowers the dominant role of CBD. This phenomenon of the movement of office activities is called office decentralization.

There is no doubt that the rental value of an office is the indicator of the value of the office. CBD offices with the highest accessibility always have the highest rental value than other offices in other districts. Therefore, the price is always the indicator of the value of an office.

1.2 Problem Statement

It is impossible to continue the steady supply of office in CBD where it has benn saturated, but Hong Kong needs them to maintain and strengthen the roles of international financial and business centre.

The Hong Kong SAR Government has been adopting ways to dealing with the problem of densely concentrated CBD. For example, it relocated some of its Grade-A offices to secondary office nodes like North Point and Sha Tin. Nevertheless, the effect of decentralizing the government offices was not significant and could not raise the initiative of private developments.

There are no clear government policies to develop new clusters. It is important to support the new clusters development and the government only relies on the private cooperation to take the lead in this aspect. Furthermore, there are a lot of problems about the conditions of existing CBD who are raised by the public like the lack of greening and traffic congestions.

There are many factors to affect the office decentralization but there is no clear idea of the importance of those factors. As there are always increasing demand and steady supply of offices, the price for offices is the indicator of the value of offices. The higher value of the office, the greater demamd for the office.

To conclude with, the paper tries to firstly review the office decentralization in Hong Hong and then determinate the importance of the factors towards office decentralization

Research Objectives and Outcomes

Literature Review

2 Literature Review

2.1 Office Decentralization in foreign countries

Office decentralization is not a fresh topic in the world. It has happened in many other cities besides Hong Kong like London and Melbourne. London was suffering from the problems of transport congestion, increasing separation of homes and workplaces, uneconomic provision of transport services for peak-hour travel required by an increasingly dispersed population, and rising property values and rents in 1960s. These problems forced the office activities to be dispersed

Wabe (1965) has conducted an empirial study of office decentralization for London. He studied the relationship between the sizes of the firms and the features they relocated by taking samples from 297 firms. His conclusion is that the firms with larger size were unlikely to leave the central area and they would like to locate their offices in the central area when they had the expansion. For medium firms, because of their expansion, they would decentralize their offices. Finally, for small firms, they would consider the office decentralization with the reason of expire lease and increasing rents. Furthermore, they would like to move out with a very short distance from the centre.

Daniels (1997) had done a research to investigate the trends and strategies of office location in British conurbations. He found that it is an inevitable result for the office decentralization when population redistribution has been taking place in Bristish conurbations since 1951.

Other than the case in London, Bell (1991) also investigated impact of travel arising from office decentralization in Melbourne. He found that there was a high demand for transport infrastructure caused by the office decentralization. However, the existing infrastructure in Melbourne at that time could not fulfill the demand of it.

In USA, Brueggeman (1995) examined the attraction of suburban sector versus CBD sector in USA by conducting a vacancy rate related Suburban Attraction Index. Finally, with accordance to Brueggeman (1995), "Suburban sector had a greater extent of improvement than that of CBD sector." Therefore, some parts of tenants in CBD were attracted by suburban sectors while the CBD sector was facing the negative absorption. In conclusion, it showed that the office decentralization was happened seriously in 1990s in USA.

Furthermore, Robert (2003) and Youguo (2003) found that the office supply in CBD markets was less than the supply in suburban markets and the vacancy rate of CBD dropped more quickly than the rate in suburban during 1990s. Another important point we should notice is that the growth rate of suburban markets was much higher than CBD markets. All these proved that the attractiveness of the office supply in suburban was increasing.

The above showed that London, Melbourne and USA had experienced the office decentralization in different ages. In Hong Kong, although the concept of office decentralization was introduced in 1980s, there were some researches about it.

2.2 Office decentralization in Hong Kong

After the operation of MTR Island Line in 1985, the Strategic Planning Unite of the Hong Kong Government conducted an opinion survey for the "office mobility". It found that normally the office activities preferred to stay in CBD and unwilling to locate their offices in new towns. (Hong Kong Government, Study on Propensity for Office Decentralization (Final Report) (Strategic Planning Unit, Lands and Works Brach, July 1984)

The Hong Kong Government then completed the "Survey on Land and Facility Requirements of Commercial Offices" in April 1990. This survey investigated the locational preferences if the offices had to move. The survey showed that near 70% would consider the areas near MTR and KCR stations but less receptive to areas like Tsuen Wan reclamation area, Shatin, Tai Po and the like. (Hong Kong Government, Survey on Land and Facility Requirements of Commercial Office (Executive Summary), Prepared for Planning Department by Marketing Decision Research (Pacific) Limited, April 1990.)

Other than the investigation taken by Hong Kong Government, Lai (1996) reviewed the Hong Kong Government Planning Policy as well as verified the office decentralization by four time-series method (rent gradient analysis, establishment shares analysis, employment share analysis and relocation history analysis). He applied this method to examine the effect of Hong Kong Government planning policy on office decentralization.

Liu (1992) had done a case study of office decentralization in Sha Tin new town. Liu concluded that it was possible for it to be an office centre especially if there were any economic boom which would lead to the increase demand for office buildings. He also mentioned that the government's intervention is necessary to strike a right balance between various activities and the designed capacity of different area in infrastructure.

Pun (1996) had also done a case study of office decentralization in Tsuen Wan. He found that there were locational advantages in Tsuen Wan such as staff availability, low accommodation cost and the like. Furthermore, the improved transport network helped Tsuen Wan to improve its accessibility like the Rout 3 and Airport railway. They were attractive to the port and airport related services, import/export trading firms and transportation companies with the proximity to the airport and container terminal. However, there were some physical constraints like traffic congestion, poor environment and incompatible land use limited the further development in Tsuen Wan.

There is another case study of office decentralization in Yuen Long and Singapore by Wong (2000). Wong (2000) concluded that the Singapore Government took an active role in stimulating its business development with 3 departments. It planned for the office development with comprehensive supports like wee-designed mass transit MRT and other transport control policy. On the contrary, the office decentralization of Hong Kong is mainly driven by the market force. There is no concrete government policy and guideline planned by Hong Kong Government for the office development.

2.3 Factors affecting office decentralization

Availability of Space

(Cowan, Peter, et al (1969), The office: A facet of Urban Growth, London, Heinemann.) (Alexander, Ian C. (1979), Office Location and Public Policy, London: Longman.)

Peter (1969) found that the expansion of firms and the opportunity of hiring new staff were directly affected by the vacant space at the right location. Also, there were many firms that paid less attention to the locational requirement which was out of the expectation. Furthermore, he pointed out that there was a tendency of those firms moving into most readily available office space without any rigorous examination of alternative.

In Hong Kong, the supply of land is controlled by the Hong Kong Government. Hong Kong is a three-tier planning system which is divided to territorial/strategic plan, sub-regional plan and district plan. The land use is regulated by the OZP of Town Planning Board. More land zoned as commercial, more availability of space to be developed.


(Harvey, Jack (1987) Urban Land Economics: The Economics of Real Property. Basingstoke: Macmillan Education.)

(R.M.Haig (1972) Major Economic Factors in Metropolitan Growth and Arrangement. New York : Committee on Regional Plan of New York and its Environs, Regional Survey, vol. 1.)

Harvey (1987) stated the general accessibility as "those advantages of a particular location in terms of movement costs it avoids and the revenue-earning capacity it affords." The office activities usually concentrated in CBD because it bears the best accessibility with a mass public transport system operation at a certain capacity. The users would like to enjoy the advantages brought by the accessibility including the clustering of shops and advisers and clustering of shops and activities. Nevertheless, the land supply in CBD is limited, the prices or rents are always high due to the keen competition among different users.

The method that Haig (1927) adopted is similar. In his discourse of office location, he focuses on the interaction between accessibility and the "cost of friction" as a result of the place of economic activities. As Haig defined, accessibility is "the ease of or difficulty of contact which it permits between activities; this contact being provided by transport which overcomes the friction of distance necessary for contact to be made".

The varying levels of profitability of different economic activities decide which particular urban space they will occupy. Better accessibility increases the demand for a particular site, which consequently increases the prices and rents in those sites. Sites with better accessibility will cost higher than other locations. As CBD is the location with the highest level of accessibility throughout the urban area, by situating in the location, it minimizes transportation cost for any activity that serves the whole city. Therefore, office activities would benefit much from locating at the centre.

Rental rate, cost of transportation and "cost of friction" are three concepts that are linked together. While transportation overcomes friction, cost of transportation and friction adds together to represent the cost of a particular commercial activity to seek a place of operation. As the place gets nearer to the CBD, transportation cost decreases and rental rate increases. Theoretically, the place with the "lowest cost of friction" is the perfect location for a particular commercial activity to take place.

Agglomerated economy (backed up + Yuen Long)

(Daniels, P.W. (1985), Services Industries: A Geographical Appraisal. London & New York: Methuen & Co.)

The agglomeration economies with adequate supporting facilities are a great concern. Lichtenberg (1960) pointed out that there was decision making process to provide solutions for a range of problems which had to be solved by synthesizing large amount of updated information and advice seeking from appropriate expertise in the city centre in office headquarters. The nature of these problems come across depends on face to face contact for the need of speed and efficiency in the decision making process. Therefore, the office headquarters were always located in the city centre.

Linkage between firms including complementary and competitive enterprises as well as near customers is vital importance of key to agglomeration economics. Daniels (1985) mentioned that the sequence of decision such as competitors, lowest cost of transportation affected the development of spatial clusters of services and other office activities. The agglomerated economy manipulated the labour demand, public transport facilities and a series of other infrastructure facilities and enhanced the exchange of communication and information. So, many firms concentrated themselves in the centre of a city to enjoy the advantages of the agglomerated economy.

Geographical location (backed up)

Distance from CBD

Quality (Study the OLDs Study)

%/numbers of Grade A office premises

Complementary facilities (TW) P.15

Pun (1996) mentioned that it is important to have shopping and catering facilities within a reasonable distance of the office location. Furthermore, basic commodities and services, such as banks, chemists, supermarket, restaurants and so on should be provided. In addition, parking spaces are also an attractiveness of a development to office users. Other supporting activities of government offices and supporting firms like post office , accounting firms and solicitors should be closely located near the office developments in order to save the commuting time of the information exchange and personal contacts among offices.

2.4 The Concept of Office Decentralization

Woodbury (1953) defined decentralization as "a process or procedure that results in the withdrawal or redistribution of something from a place in which it has previously been concentrated". According to the above definition, office decentralization is the relocation of office buildings, office space or office employees from a densely built area to a less densely built area.

Density and congestion in the CBD interdicts part of the commercial activities to move to less densely built and developed area. Some main causes of the relocation are the soaring occupation cost in the CBD and scarcity of available sites. Despite the advantages to situate in the CBD, the disadvantages may sometimes be prohibitive for entrepreneurs to locate their operation in the CBD, most importantly the prohibitive rates of accommodation and simply the absence of available spaces.

Decentralization can be categorized into "primary" or "secondary" decentralization based on the nature of the decentralization processes. Primary decentralization is the movement of office spaces from prime CBD area to its fringe area. Alternatively, this can be considered as a linear expansion of the CBD area to its adjacent areas. During the beginning of the decentralization process, primary decentralization reduces the expenses on office rentals while keeping the commercial activities close to the CBD. Secondary decentralization refers to the relocation of the office to areas that are significantly beyond the CBD areas. This will prompt the development of new office centres.

Governmental directives, initiatives from private developers and the level of demand for office spaces all dynamically influence the extent of success of office decentralization. Government can influence by developing better infrastructure to make remote areas more accessible or provide lands from specific areas; private developers controls the quality and quantity of office spaces available to the market; office users ultimately decide whether to relocate their offices.

In conclusion, the demand and supply for office spaces and the expansion of infrastructure are equally important factors in the process of office decentralization.

2.5 Review on Government Policies

Review on the Existing Planning Strategy of the Government

Government's policy is one of the factors to affect the success of decentralization. It included controlling the market by controlling the supply of land with zoning and the investment on the infrastructure to improve the accessibility.

Regarding to the existing strategy of the Government in developing the new offices nodes by relying on the private initiatives, and her plan in developing the new office nodes at former Kai Tak Airport site and the West Kowloon Reclamation (Figure 5 refers).

In prior to the cases in Kai Tak and the West Kowloon Cluster, the Taikoo Place in Quarry Bay Cluster is a useful study in demonstrating the decentralization of CBD Grade-A offices by private initiative. It reviewed that the Government only relied on private initiatives for the development. In fact, supports to private initiatives are susceptible and the Government's proactive planning is not clear too.

Furthermore, the Government started its office decentralization policy in 80's, which includes the Territorial Development Strategy in 1984 and a detailed review in 1996.

(a) Territorial Development Strategy in 1984

Territorial Development Strategy (TDS) was promulgated in 1984. With the objective of producing a planning-transport-environmental framework to guide the preparation of plans and programmes for future and major development projects, TDS aimed for the preparation of more detailed plans and programmes to meet the needs of Hong Kong for both medium term (up to 2006) and the long term (up to 2011).

TDS suggested that land supply should be increased for office development in non-CBD area. It was also the reason to explain why the Government started to relocate its offices to non-CBD area later wards. TDS also suggested the encouragement in the change of land use from industrial to office as it foresaw the great increase in demand of Grade-A offices in CBD.

(b) More detailed office decentralization policy in 1996

Another major achievement of the TDS Review was the introduction of the sustainable development concept, which has subsequently led to a major study under the title "Sustainable Development for the 21st Century" (SUSDEV21) conducted at the turn of the century. The study aimed to redefine the concept in order to suit Hong Kong's circumstances and develop proposals for a user-friendly system which can provide a basis by which policies, resource allocation, planning, programming and works implementation could be developed, applied and monitored in a coordinated and sustainable manner.

In this TDS review, reclamation and redevelopment were suggested for further expansion of the current CBD. Also, further expansion of existing office nodes in North Point and Quarry Bay were also suggested. Last but not least, development of the new offices modes and I/O nodes were also introduced.

In short, there seems to be a continuous role for the Government to ensure a steady supply of suitable land. Support from the government is important to private initiatives, which directly affect the choice of office location; at least it may facilitate some office decentralization especially of back-office activities.

2.6 Terms and definitions

Definition of CBD

The CBD is generally defined as the central district of a city, usually typified by a concentration of retail and commercial buildings which there is no exception in Hong Kong. According to the definition of CBD from Ratings and Valuation Department, five traditional office districts are defined as the core districts of Hong Kong, namely, Central, Wanchai, Causeway Bay, Sheung Wan and Tsim Sha Tsui. For the purpose of the study of this paper, we have defined these districts as the CBD.

Definition of Grade-A Offices

Definitions of Grade-A offices are common from every source. I have come up with several definitions on internet, the general definitions would be modern offices with high quality finishes; flexible layout; spacious, well decorated lobbies and circulation areas; effective central air-condition lift services zoned for passengers and goods deliveries; professional management; parking facilities normally available. In short, the definition of Grade-A office from Savills is quite straightforward and easy to be adopted.

Grade Definition of Offices from Savills2

Grade A

Modern specification building with high quality finishes incorporating a suspended ceiling, raised floor or underfloor trunking, in prime location.

Grade B

Medium quality building in prime location or Grade 'A' standard building but in secondary location.

Grade C

Basic specification or older building, with poor quality finishes, usually located in a non-core location.

Figure 1 - Grade Definition of Offices from Savills

It is clear that all definitions of Grade-A offices should include prime location. For the purpose of the study of this paper, we have defined Grade-A offices must be located in prime location and with modern specification provision.

Chancheukyat P.6,7

3 Methodology

Rent Gradient Analysis

As in Brueggeman's discourse (1995), he used rents to indicate the competiveness of CBD against suburban in the United States. In conclusion the CBD faces very intense competition from the suburban area.

In Lai's analysis (1996), he studies the competitiveness of the CBD in Hong Kong during 1980 to 1993 with the use of Bid Rent Curve. In his analysis, he found out that the rental rates of the CBD was much higher than non-CBD area, which implied that the CBD was much more competitive than the non-CBD area, which can only function as subordinates to the CBD.

Alonso (1974) formulated the Bid Rent Theory. In his theory, he concluded that because the CBD is physically highly accessible and limited in supply, the rental rate is the highest in the CBD area. Rental rate is in inverse proportion with distance from the CBD area.

Figure 6 - Graph of bid-rent curve

The Bid Rent Function can trace the degree of office decentralization by analyzing the office rental rates of CBD and non-CBD during different time spans. Generally speaking, there are three phenomenons. Firstly, if the curve of the rental rates is identical to the Bid Rent Function, it implies that the degree of office decentralization is insignificant; secondly, if the Bid Rent Function is concave in shape, it implies that the CBD is more dominant than its fringe area, meaning that office decentralization will occur; thirdly, if the Bid Rent Function is convex in shape, it implies that the CBD is less dominant than it should be theoretically. Thus, office decentralization perhaps has occurred.

Theory Location can be applied to explain the relationship between the distance from CBD and rental of office nodes. A curve can be generated to show the relationship clearly.

Figure 7 - Convex bid-rent curve

Whenever a convex curve is generated, it applies there is a LOW dominancy of the CBD. It indicates that the treat of office decentralization is relatively obvious. (Figure 7 refers)

Figure 8 - Concave bid-rent curve

Whenever a concave curve is generated, it applies there is a HIGH dominancy of the CBD. It indicates that the treat of office decentralization is relatively limited. (Figure 8 refers)

Data collection method

Most data is available in Rating & Valuation Department in the form of rental index and per floor area per time period, but date for a particular area may be unavailable. However, those data can be found in other auxiliary sources, for example reports from private companies or the newspaper.

Expected result(s)

Office decentralization began in the 1980s, and there have been an increasing trend since then, which is peaking presently. Despite such trend, companies still favour to set up offices in the CBD region, and therefore the rental rate in the CBD is still higher than the non-CBD area. I expect the Bid Rent Function curve will be in a convex or even shape. In the other words, the difference of the rental rates between CBD and non-CBD area is smaller than that in theoretical situation.

Multiple regression analysis

Regression analysis is a statistical method that could determine the mathematical relationship between a dependent variable and independent variables. (Adair and McGreal (1987). When the multiple regression analysis (MRA) is being used, the independent variables are used to identify some variables which could influence other dependent variables. The objective of MRA is to examine whether an independent variable increases with a constant increase or decrease in the dependent variable. Then, the value of the dependent variables from that of the independent variables can be predicted. The score of another variable can be predicted with a knowing score on one variable if these two variables are correlated. The scores will fall closer to the regression line if the correlation is stronger and that the prediction will be more accurate. MRA is applying this theory which can predict one variable on the basis of several other variables. This is the general multiple linear regression model:



represent the ith observations of each of the variables respectively.


fixed (but unknown) parameters


a random variable that is normally distributed with mean zero and having a variance

The strength of each independent variable influencing the dependent variable would be measured by the Beta value that it is measured in units of standard deviation. For instance, when the Beta value is 3, a change of 3 standard deviations in the independent variable will cause in a change of 3 standard deviations in the dependent variable. So, the higher Beta value will result in a greater impact in the independent variable on the dependent variable.

The Beta is equivalent to the correlation coefficient between the independent and the dependent variable when there is only one independent variable in the model. On the other hand, the contribution of each independent variable cannot be compared by simple correlation coefficients if there are more than one independent variables. Therefore, the strength of the relationship between each independent variable and dependent variable can be compared by the computed Beta regression coefficient in multiple linear regression model.

There are some assumption made by Makridakis et al. (1998):

The explanatory variables take values which are assumed to be either fixed numbers (measured without error), or they are random but uncorrelated with the error terms . In either case, the values of must not be all the same.

The error terms are uncorrelated with one another.

The error terms all have mean zero and variance , and have a normal distribution

Data collection method

Expected result(s)

4.Analysis on the current situation in Hong Kong by using Rent Gradient Analysis

4.1 Source of data

The rent gradient for Hong Kong would be analyzed from 1999 to 2008 including the Grade A, B and C offices where the retal statistic is obtained from the Rating and Valuation Department, Government of Hong Kong. Central, Sheung Wan, Wan Chai/Causeway Bay, Yau Ma Tei/Mong Kok, Tsim Sha Tusi and North Point / Quarry Bay. In addition, the percentage of rent in CBD is expressed by a three dimensions chart.

4.2 Data Analysis

4.2.1 Rent gradient analysis on Grade A offices

The bid-rent curve for nominal rental for Grade A offices in Hong Kong was shown in Figure with the bid-rent profile shows the relative rent ratios of CBD to non-CBD in order to eliminate the factors of inflation and deflation.

A concave curve is generated and showed a higher dominancy of CBD. It implies the trend of office decentralization for Grade A offices is limited.

This graph also shows an interesting finding, that is the relationship between the rentals and economic condition in Hong Kong. In 2003, economic downturn and SARS happened in Hong Kong, the general rentals were dropped tremendously, it is the blue curve shown at the bottom of the graph. The variation of the 2003 blue graph is low and slope of the concave curve is gentle. In 2007, economic condition in Hong Kong was fine compared to the previous years, rentals for Grade-A offices were increased in high proportion. The light blue curve climbs to the top in the graph showing the high rentals of Grade-A offices within the last ten years, however, it is also clear that the slope of the concave curve is much steeper than others, it implies that the effect of office decentralization is limited when the economic condition was fine in Hong Kong. Financial related business has relatively higher profit during fine economic condition, they expand the office size and hence they will compete the limited supply of Grade-A offices in CBD, which also explains why the slope was much steeper in 2007 than 2003.

4.2.2 Rent gradient analysis on Grade B offices

The bid-rent curve for nominal rental for Grade B offices in Hong Kong was shown in Figure with the bid-rent profile shows the relative rent ratios of CBD to non-CBD in order to eliminate the factors of inflation and deflation.

Although a concave curve is generated and showed a higher dominancy of CBD, the curve is less steep than the curve of Grade A office especially in the early year from 1999 to 2004. However, the rent in CBD increased sharply from 2004 to 2008 which the dominancy of CBD became higher after 2004. It implies the trend of office decentralization for Grade B offices is better than Grade A offices.

4.2.2 Rent gradient analysis on Grade C offices

The bid-rent curve for nominal rental for Grade B offices in Hong Kong was shown in Figure with the bid-rent profile shows the relative rent ratios of CBD to non-CBD in order to eliminate the factors of inflation and deflation.

4.3 Conclusion

5. Regression Analysis on the office decentralization

Factors for the regression method (Yuen Long)

Accessibility + commuting time (backed up + TW thesis)

Number of accessible methods

e.g. MTR, Buses, Minibuses, trams, ferries, car(road/infrastructure), taxi stands

Agglomerated economy (backed up + Yuen Long)

Geographical location (backed up)

Distance from CBD

Quality (Study the OLDs Study)

%/numbers of Grade A office premises

% of OZP (Gov't Policy)

Dependent variable: rent or price

Independent variables:

1. Distance from CBD

2. Commuting time

3. Agglomerated economy

4. Quality

5. Availability of space

6. Accessibility


Sheung Wan


Wan Chai/Causeway Bay

North Point/ Quarry Bay

Tsim Sha Tsui

Yau Ma Dei/ Mong Kok

Discussion and Recommendation


Reference and Bibliography

To do list:

Find the office land development strategy (OLDS Study)

Find OLDS survey

Find Gov't Policy (TW + Shatin thesis)

Find a paper to show there is office decentralization in Hong Kong

Study Agglomerated economy