Hong Kong offices: a great leap forward?

September 13, 2016 / By  

Over the past 12 months, PRC buyers have created quite a buzz in Hong Kong’s office investment market with a number of record-breaking transactions. The ball got rolling late last year when Evergrande acquired Mass Mutual Tower in Wanchai for HKD 12.5 billion (USD 1.6 billion), the largest amount ever paid for an office building in the city. This was quickly followed by Everbright’s purchase of Dah Sing Financial Centre for HKD 10 billion (USD 1.3 billion). Across the harbour at One HarbourGate in Hunghom, China Life purchased the West Tower for HKD 5.85 billion (USD 750 million) while Shenzhen-based Cheung Kei Group bought the East Tower for HKD 4.8 billion (USD 620 million); both record highs for the district, in terms of unit price.

The strong influx of PRC capital comes at a time when rental markets are starting to look wobbly. While vacancy rates are still tight across most submarkets, demand growth remains weak. Coupled with increasing new supply, rents are already starting to trend lower in submarkets. Moreover, the record high prices that were initially restricted to the en-bloc market are now starting to appear in the strata-titled sales market with a number properties being transacted at record high unit rates. As a result, commercial property yields are now also starting to trend lower; currently in the range of 2.5-3.0% and already close to the cost of borrowing for many institutional investors and local developers.

Yet, yields may harden further. The government’s planned tender of the Murray Road Carpark, the first commercial development site to be offered by the government in Central in over 20 years, is drawing considerable interest. For PRC corporates, the site represents as a rare opportunity to own a trophy asset in the city’s CBD; a desire that has been difficult to fulfil given that such assets are tightly held by a handful of owners. Not surprisingly, market expectations are now reaching hyperbole with estimates on the Gross Development Value of the site at close to HKD 24 billion (USD 3.1 billion) or about HKD 54,000 per sq ft, compared to an average price of about HKD 30,000 per sq ft for the Central Grade A office market. PRC buyers are able to pay such high prices because of their access to favourable financing terms as well as not needing to build in exit strategies; most are buying trophy assets to help build their brand.

If the Murray Road Carpark is sold at these levels, there is a potential that pricing benchmarks for the Grade A office market will be reset across the city. More importantly, it will be interesting to see if these adjustments are made across the market or restricted to the trophy assets that are highly sought after by PRC corporates.

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