Singapore looks like an attractive location for firms wanting to exit Hong Kong, but they may find that a move to the city-state hits their bottom line more than expected.
With inflation soaring to the highest level in 14 years, expenses including the hiring of talent, office space and utilities are rising at a faster pace in Singapore than in its financial rival, where price increases have been more modest.
Accelerating prices have not stopped the rate of new business formation in Singapore from reaching a 17-month high in August. In Hong Kong, the number of new local businesses has held roughly steady with 2021's pace but is down from a peak in 2017.
Here is the outlook facing companies considering a relocation:
Hong Kong is the most expensive office market in the world, but unpredictable virus guidelines and political uncertainty have plagued its economy, forcing landlords to cut office rents in core business districts in the period to June by 4 per cent from December. In contrast, the cost of rent in Singapore's central business area accelerated for a third quarter, continuing its upward momentum.
Singapore's rental costs still remain well below Hong Kong's, and even Beijing's, according to a report by real estate services firm JLL Singapore, but the gap is narrowing.
COVID-19 RULES AND LABOUR SUPPLY
Singapore has scrapped the majority of its Covid-19 restrictions, including mask-wearing in most places, taking strides towards normalcy and a full reopening to the world with the aim of luring more white-collar talent. Meanwhile, Hong Kong is playing catch-up, finally moving towards the elimination of mandatory hotel quarantine for inbound travellers after requiring 21 days.
As a result of earlier quarantine clampdowns, labour tightness has been an issue for both hubs. Singapore's ratio of job vacancies to those unemployed reached a historic high in the second quarter. This resulted in salaries for new job offers rising faster than those in Hong Kong in many key sectors last year.
"Singapore's faster reopening and 'living with Covid-19' versus Hong Kong's zero-Covid-19 strategy is driving the divergence and higher increase in manpower and rental costs," said Dr Chua Hak Bin, an economist at Maybank Investment Banking Group.
Numbers are not available yet for this year, but pay increases for civil servants, which can have a knock-on effect on the private sector, have shown some notable differences. Singapore's civil servants are expecting a pay rise ranging from 5 per cent to 14 per cent this year, while Hong Kong has proposed a 2.5 per cent boost.
ELECTRICITY AND OTHER COSTS
Hong Kong regulates its two electricity providers, but it is not immune to the energy price increases that swept the globe following the war in Ukraine. The North Asia financial hub's electricity prices jumped in 2021 before settling down this year, only to be outpaced by Singapore, which saw its latest electricity inflation rate rising to the highest on record.
For now, Singapore's faster inflation is not a major drag.
"Higher manpower and rents may slow business formation, but will probably not derail the rising trend," said Dr Chua.
For firms thinking of a move, or starting from scratch, a key question is how long these trends will continue.
Is Singapore at the start of a boom cycle that will see costs outpace Hong Kong's for years, or will Hong Kong's prices pick up pace now that the territory is starting to move past the toughest of its Covid-19-era restrictions.
Until that becomes clearer, other structural factors may prove decisive for companies trying to make a decision now.
Those include the intensifying geopolitical rivalry between the United States and China, Hong Kong's national security laws and the diversification of supply chains towards Asean countries.