Last week, it was reported that Rykadan Capital Tower, a new 207,000-sq ft Grade A office development currently under construction in Kowloon East, was fully sold just days after it was issued with its pre-sale consent; with prices ranging from HKD 7,000-10,000 per sq ft. The remarkable sales result achieved at Rykadan Capital Tower is just the latest in a number of highlights for the Kowloon East investment market. Earlier this year, China Construction Bank acquired the whole of 18 Kowloon East for HKD 2.51 billion while a strata-titled office unit in Billion Centre was recently sold for over HKD 11,000 per sq ft. Moreover, Kowloon East has quietly become the most highly traded Grade A office investment market in the city in 2012, in terms of the number of transactions over HKD 20 million.

So what is driving investors into this former industrial enclave? There are a number of reasons.

Firstly, prices in Kowloon East are still relatively low when compared to the other established submarkets. For example, while unit rate prices in some new developments are now reaching eye-popping levels, they remain, on average, about 75% lower than in Central.

Secondly, the Kowloon East leasing market has now achieved critical mass. Over the past five years, the occupier market has close to doubled in size (to about 11.9 million sq ft) while the vacancy rate has plummeted from a high of 27.9% in 2008 down to just 3.8% at the end of October 2012. Growth has been supported by the willingness of larger multinational companies from the insurance and shipping/logistics sectors to relocate their offices from other areas in the city into the submarket.

Thirdly, the release of the government’s CBD2 blueprint along with the revitalisation policy measures has helped create an attractive long-term investment proposition. The development of Kowloon East into a future CBD implicitly suggests that prices in the submarket will rise in tandem with its emergence. The CBD2 vision also provides short-term investors a ‘story’ to sell to incoming investors.

Fourthly, and perhaps most importantly, much of the recent interest in Kowloon East has been due to the availability of investment grade properties. Over the past five years, about half of all new commercial Grade A office floor space has been built in Kowloon East, with a significant amount built purely for the sales market.

So what can we expect moving forward? If we look at the supply pipeline for Kowloon East over the next three years, almost all of the new developments are likely to be built for the sales market. Against this backdrop, investment activity in Kowloon East will likely continue to gather momentum and lend further support to prices.

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