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Snippet | Office market can learn from 2021, and advice for fund managers

In the latest Colliers Snippet, Office Services Director Jason Fung looks back to see what’s to come in the office market, and Capital Markets & Investment Services Director Matthew Cheng suggests fund managers should team up with local developers.

2021’s office market recovery points to what we can expect for H2 2022

 
We saw some definite green shoots of recovery at the end of last year. In fact, office leasing in H2 2021 improved, with several districts, including Causeway Bay, Tsim Shat Tsui and Kowloon East, recording positive net absorption. Some Grade A1 offices in Central recorded a marginal YoY rent increase of 0.4%. As Hong Kong is struck by the fifth wave of the pandemic, we look to last year to see what this one has in store.

While many companies from mainland China have been affected by new Government regulations in sectors such as technology, real estate, securities and education, some PRC financial companies still went ahead with their expansion plans. Asset management firm Amber Hill took a whole floor in Two IFC in Q4 2021, and in the previous quarter, Haitong Securities took space in One IFC. Demand from mainland companies will improve further once the regulations have been finalised and there is more clarity on which direction to develop in Hong Kong.


"Demand from mainland companies will improve further once the regulations have been finalised"


Hong Kong has always been the preferred offshore-listing destination for PRC companies. Now, with the return of US-listed PRC companies and the Special Purpose Acquisition Companies (SPACs), it looks like we will have a strong IPO pipeline in 2022, primarily benefiting office landlords in Central.

Given the rise of NFTs, art-related businesses were active in the second half of last year, setting up their own brick-and-mortar galleries, auction houses and exhibition halls. Christie’s took 50,000 sq. ft. in The Henderson and will leave Alexandra House, and Philips took 45,000 sq. ft. in M+ to move from St George’s Building. As NFTs’ popularity seems to be going the way of cryptocurrency, we expect more office demand from this sector.

The pandemic-driven uncertainty has made coworking spaces a popular alternative to having many staff members in one centralised office. Currently, many companies are waiting for the market to stabilise before finalising their office requirements, but many prefer coworking's flexibility.

We’ve seen MNCs taking this opportunity to consolidate their office requirements and opt for a flexible workplace strategy. In fact, this market is so robust that some operators are looking to expand to fill demand. Hong Kong is still a significant financial hub for firms seeking to build their presence in mainland China.  

We have a win-win for fund managers seeking opportunities in Hong Kong

 
Ample liquidity in the Hong Kong property market makes it more difficult for investment funds to identify opportunities with the appropriate returns to fit their investment requirements. Traditionally, funds focus on the non-residential property market, such as office, industrial, retail and hotel. However, we’ve recently seen an increasing number of joint ventures between funds and local developers in housing. 

For example, The Netherlands-based pension fund manager APG partnered with Wang On late last year for a 50% stake in four of the developer's existing projects, Canadian pension fund manager CPPIB joined CSI for a project in Yau Ma Tei, and global alternative investment fund manager Angelo Gordon co-invested with Hanison earlier last year for a residential development in Kowloon Tong.  

Despite the pandemic, 2021 was filled with investment activity, witnessing volumes rebound, particularly in the industrial sector. 


"Industrial prices have increased significantly, while available options have decreased."


As a result, industrial unit prices have increased significantly, while available options have decreased. The office and hotel markets remain a little sluggish, and we foresee a more extended recovery for retail. 

The local residential market remains strong due to the perennial issue of supply not meeting demand. Its exceptional performance offers fund managers a chance to achieve their IRR requirements. 

Hong Kong’s small-to-mid-scale developers have established their brand names and capitalised on their knowledge of local residential development. However, a capital partner with strong financial capabilities would be an ideal boost that would allow them to compete with the leading developers. 

By partnering with institutional funds, local developers get access to a larger pool of capital and a chance to boost their branding on an international level. Institutional funds can leverage local developers’ experience, resources, and expertise to lead the project while expecting the required investment return. It’s a win-win.


"Institutional funds can leverage local developers’ experience, resources, and expertise to lead the project while expecting the required investment return."


With the success stories of APG and CPPIB, more funds are in discussions with residential developers for potential joint ventures, mainly in the mass market. Partnership arrangements are 50/50 or 40/60, with the fund being an equity partner and execution by local developers, allowing returns to be achieved in the most cost-effective way. 

However, as institutional funds typically have restrictive guidelines on selecting JV partners, local developers should be prepared to have a more comprehensive discussion process.

The fifth COVID-19 wave and its countermeasures have negatively affected the overall market. And while the industrial market remains a focus, due to demand for data centres, cold storage and Government-supported revitalisation policies, there is a deficit of available options. We expect the non-residential market’s recovery to be duly lengthened. 

The residential market is expected to continue outperforming the general market, encouraging more funds to consider partnerships with local developers for residential developments for a win-win situation.