Hong Kong ranks as the world's most expensive high-street retail destination with average rent of US$4,327 per sq ft per annum, surpassing New York, Paris, London and Tokyo by a substantial margin, according to the latest research from CBRE. This is the third consecutive year that Hong Kong has ranked top of the global list.
Investors snap up grade B space
Easier access to credit has brought property investors back to the market in search of retail stores in non-prime locations and grade B offices.
'The market turned active at the end of January after banks relaxed their mortgage conditions for investment properties after the Chinese New Year,' said Elvin Yau Chun-fat, a director of the investment department at property consultancy DTZ.
But retail stores in prime locations and grade A offices are no longer being targeted by investors.
'They are now looking for retail properties in shopping districts off the main streets and in secondary locations such as Central's Wellington Street or Causeway Bay's Pak Sha Road,' said Kent Fong Chi-kit, co-head of investment at property agency Cushman & Wakefield.
In the industrial sector, Fong said, investors were looking for en-bloc buildings selling for about HK$1,000 per square foot. There are a number of such buildings available in Kwai Chung.
Investors bid aggressively for grade A offices in Central and Admiralty last year, as prices were seen to have lagged price growth in other property sectors. But Fong said demand for grade A offices had cooled this year because office rents were seen as coming under downward pressure. Property analysts were forecasting at the turn of the year that grade A office rents would fall by 10 to 20 per cent in 2012.
'Investors have now shifted their focus to grade B offices - particularly those with a floor plate ranging from 4,000 to 7,000 square feet. This kind of office space is now worth about HK$10,000 per square foot.'
Fong said grade A offices were seen by investors as 'price-sensitive' and vulnerable to an economic downturn. 'Most tenants are financial institutions. If the economy worsens, the finance sector would suffer the most and this will dampen demand for grade A offices,' he said.
Also, whereas prices of grade A offices had risen and the investment risk would be high as rents fell, rents of grade B offices ranged from HK$28 to HK$30 per square foot and would be more resilient to any declines.
Helen Mak Hoi-lun, retail services director at property consultancy Colliers International, said that while the outlook for the residential and office markets was uncertain, the retail market remained in favour.
Lay-offs by financial institutions continued and this was affecting the investment potential of office properties, said Mak. Investors were also awaiting the outcome of the election for chief executive on March 25 before taking a view on the residential market, he said. 'By contrast the retail market is seen as being supported by the influx of mainland travellers. Investors therefore have confidence in the sector.'
Fong said investors expected shop rents in second-tier streets to increase. 'Rents in prime locations such as Queen's Road Central have risen to a high level, and this has forced many retailers to relocate to non-prime shops. This has attracted investors who are looking for higher upside potential,' he said.
Mak echoed these observations and said prestige brands such as Vivienne Westwood and Lacoste had relocated to second-tier streets such as Wellington Street or Lyndhurst Terrace. 'Tenants at these locations used to be smaller retailers,' he said. 'Now they are attracting international brands and investors see a high upside potential for such locations. The same happened with Tsim Sha Tsui's Carnarvon and Cameron roads.'
Yau said rental yields on retail properties in prime shopping districts were about 2 per cent and rents could double when leases come up for renewal.