Why Hong Kong has the world's most expensive office space

KEY POINTS

• Hong Kong's Central district is ranked the world's most expensive office space for a third consecutive year.
• An increase in demand from Mainland Chinese firms is driving up costs.
• Office space is around 30 percent higher in Hong Kong's Central area than London's West End.

Having an office in Hong Kong is getting pricier.

Hong Kong's population — numbering more than 7 million — has a limited amount of land to potentially inhabit, which has positioned Hong Kong to be the world's most expensive housing market. Now, a number of mainland Chinese firms are moving in and driving up costs of already expensive office space.

In fact, the city's Central district was recently ranked the world's most expensive office space for a third year in a row, according to a report from commercial real estate firm CBRE.

"Strong demand coupled with low vacancy in the CBD (central business district) has kept the office market robust and prices have reacted," Tom Gaffney, Regional Managing Director of CBRE's Greater Bay Area & Hong Kong region, told CNBC.

Office space in Hong Kong's Central now costs $306 per square foot per year, on average. That's 30 percent higher than the second highest area, London's West End, which came in at only $235 per square foot.

"The lack of new office supply in the CBD will also be limited for the coming few years, reinforcing Hong Kong’s standing as the world’s priciest office market," Gaffney added.

Banking and finance are the key sectors driving prime office demand, with additional increases coming from co-working spaces.

Mainland Chinese firms, particularly banks, prefer the prestigious Central district when choosing office space, Gaffney said, citing several large recent dealings which closed in the second quarter.

The area is so popular that vacancy rates in Central Hong Kong stand at just about 1-percent, according to CBRE.

Hong Kong's Central district is home to large regional hubs for the likes of HSBC and J.P. Morgan, but increased office rent may be putting pressure on legacy banks.

Goldman Sachs is planning to move its back office out of Central to another part of Hong Kong, according to a report by SCMP.