The Hong Kong investment market has been facing a challenging environment amid the double whammy of the prolonged US-China trade war and the ongoing local demonstrations. The Strata title office will be a huge opportunity for investment given the sectors incredible price surge since 2010. Recent transactions include the sale of level 31 Fortis Bank Building at HK$25,319 per sq ft (HKD158 million) reflecting a 20% discount from the asking price and level 16 Rykadan Capital Tower in Kwun Tong sold at HK$10,600 per sq ft (HKD129 million) reflecting a 25% discount from asking. With Grade A office rents expected to fall 10% during 2020, we also expect office prices to drop 20-30% from the peak in June 2019.
The outbreak of the coronavirus has frozen the already cooling market and the current weak sentiment has encouraged buyers to expect a further discount from December values. With prices doubling since Henderson Land purchased the Murray Road site in Central for a record AV HKD50,064 sq ft in 2017, many owners of strata title offices in CBD areas have an opportunity to realise their gains and reinvest into other sectors or markets - ‘a bird in the hand’.
Given the current situation, we expect the strata title office sector to hit the bottom of the cycle around June, with prices falling a total of 35% from the last market high point.
Looking back at history, 2003 saw office prices drop more than 50% from the previous peak in 2000. Since then, office prices have rebounded over 10 times, off the back of a global financial sector restructure with Hong Kong being chosen as a key center. Despite a short the drop in 2009 following the GFC, office prices rebounded quickly increasing almost 300% to 2018. This tells us that downcycles in the office sales market tend to be short, given the low supply and robust market fundamentals.
Consequently, we expect office prices to rebound to 2016/17 levels, but they are unlikely to reach the previous peak in 2018, unless there is aggressive buying again by Chinese buyers.
Source: Colliers International
According to Colliers Annual Investor Survey Report 2019, the majority of the respondents plan to deploy their capital in Hong Kong’s property market and be a net buyer in 2020. Core assets such as Grade A offices in the CBD area have always been most the sought-after by investors, given its nature of high market liquidity and strong capital value gain.
As an upturn and a short down cycle are expected, we believe that it is good timing for wealthy family offices and professional investors to start treasure hunting in the office sector.
There are several areas we suggest investors to look. First in the Wan Chai, Admiralty/ Central and Western districts. Second, end-users most affected by the US-China trade war may want to cash out at this point, especially if they have held the property for a while. Thirdly, individual owners who face greater pressure from weakening financial support and business.
Gems in the core areas will offer yields of 3.5-5.0%. As supply is limited, CBD office prices should rebound more quickly once the market picks up again, benefitting buyers who can make sharp decisions to seize the right opportunities.
What does 2020 hold?
We expect rents and prices for offices to fall quickly over H1 2020, bottoming out around July to then move up in Q3/Q4, assuming that coronavirus is brought under control within March. While, price and rental growth will be negative at the end of 2020, we see major turning points such as the Central to Shatin Link opening on 14 February 2020 as confidence boosters. With strong fundamentals, a low interest rate environment and limited supply, 2020 will be a good time to for owner occupiers and long-term investors to buy. While the downturn will mean accepting a lower exit price for sellers, given the meteoritic price rises it will be a win:win.
Where is the market going over the longer term?
The current adjustment of capital values should attract more overseas buyers, who previously found Hong Kong too expensive, to enter the market. Institutional investors, investment banks and property funds should invest in properties with higher yield and potential capital gains.
As yields stablise, capital values should grow rationally, attracting more institution buyers who prefer returns over growth. As market liquidity is stimulated by more investors together with the opportunities within the Greater Bay Area, Hong Kong’s longer term economic and business growth will attract investment among the global gateway cities.
In the foreseeable future, interest rates should remain low, given that major economies have been implementing loose monetary policies, supporting financing and investments.