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Firms move to the city at fastest pace in a decade, driving rents higher in Central district

By DOMINIQUE FONG
Nov. 10, 2015 1:00 a.m. ET



Hong Kong’s Central district, already studded with the world’s priciest office towers, is attracting more mainland Chinese companies to move in, sparking a rise in rents and prompting some Western firms to search for cheaper digs elsewhere.

Despite China’s stock-market tumult this year, mainland banks and asset managers are crowding into the district in hopes of drumming up new business with foreign clients.

The moves are further cementing Hong Kong’s status as the prime gateway into and out of China, property experts and bank analysts say.

The shift “[is] part of the grander plan with regards to the strategy of the government for financial institutions and corporates to go global,” said Jonathan Cornish, head of bank ratings for North Asia for Fitch Ratings, who has tracked the expansion of Chinese banks in Hong Kong. “Hong Kong is a very obvious launching pad for them to do that.”

Mainland China firms long have had a presence in the former British colony. Bank of China opened its first office here in 1917 and now occupies the I.M. Pei-designed Bank of China Tower. In the early 2000s, the four largest state-controlled banks opted to list on the Hong Kong stock exchange and took nearby office space, sometimes whole buildings.

Now smaller commercial banks are expanding in the city, driven in part by a program that began this summer allowing money managers to sell funds across the mainland border and in part by Hong Kong’s status as a major clearing center for transactions done in yuan as China pushes to have the currency used more widely in global payments.

Beijing-based China Minsheng Bank recently signed a lease for an entire floor at Two IFC, the city’s second-tallest high-rise, according to real-estate services firm Jones Lang LaSalle. Bank of Shanghai took a floor at Citibank Plaza, according to services firm CBRE Hong Kong. China Minsheng Bank and Bank of Shanghai didn’t respond to requests for comment.

Xiamen International Bank recently expanded its office at Two Exchange Square in Central, while China Bohai Bank and Bank of Dongguan also took up smaller representative offices, according to Paul Louie, a Barclays property analyst. Xiamen didn’t respond to a request for comment. China Bohai Bank and Bank of Dongguan couldn’t be reached for comment.

In all, the number of mainland companies in Hong Kong jumped 14% to a record 1,091 in June from a year earlier, the fastest pace in a decade, according to an annual survey compiled by Invest Hong Kong, a government department set up to attract foreign direct investment, and Hong Kong’s official statistics agency.

Chinese firms now lease about 2.8 million square feet of the top 25 Grade A office buildings in Hong Kong’s Central district as of the third quarter, up 75% from the end of 2008, according to CBRE Hong Kong.

Strong mainland Chinese demand for top office space in Hong Kong has pushed down vacancy rates to 1%, the lowest in seven years, according to CBRE Hong Kong. This has helped drive the world’s most expensive office rents higher with top office space at 255 dollars a square foot a year in Hong Kong, according to global real-estate consultant Knight Frank. Second place is New York, at 153 dollars.

Overall, rents are projected to jump 15% in 2015 and an additional 7% next year, said Mr. Louie of Barclays.

The rising rents are prompting some Western firms to explore cheaper options such as Kowloon East, a largely industrial hub across the harbor that sits at the edge of the mainland peninsula. Rents there are roughly a third of the 101 dollars-a-square-foot asking price in Central, according to Jones Lang LaSalle.

Citigroup Inc. bought one building in a pair of twin towers there last summer for 5.4 billion Hong Kong dollars (696.6 million US dollars). In September, Manulife Financial closed the purchase of the other tower for 4.5 billion Hong Kong dollars.

“If rents in Central keep going up, then what you might see is a little more decentralization coming through,” said Denis Ma, head of research at Jones Lang LaSalle.

Some property developers are betting that more companies will make the move to Kowloon East, which is being planned as a major new business district. Swire Properties, for example, has been excavating ground planned for a Grade A office building with 555,000 square feet of gross floor space in the region’s Kowloon Bay, though it is considering selling the site.

“We have seen keen market interest in Kowloon East recently,” a Swire spokeswoman said.

More global banks could follow Citi’s move, which sent a “very strong signal” to the market of the quality of the location, said Simon Lo, executive director of research at real-estate brokerage Colliers International.

“Some of the bigger banks are still interested in looking at decentralizing locations to Hong Kong East and Kowloon East, and landlords have been trying to pull banks out of Central,” said Mr. Ma of Jones Lang LaSalle. “Ultimately, crossing the harbor is going to take a little while.”

Write to Dominique Fong at Dominique.Fong@wsj.com