Bad ideas can go a long way when repeated often enough. One of the worst is the new consensus being aired by developers, property agents and analysts suggesting an imminent boom in office prices. Since the peak of the 1994 frenzy, capital values have fallen a crushing 50 per cent for buildings that saw the most speculative trading. Now, the argument is that lower prices and huge rental demand from mainland companies setting up in the territory before the handover will support a reinvigorated market. That was the message of new listing Wah Tak Fung Holdings, whose managing director said the company's 104 per cent gearing should be seen as a leveraged play on the office market. The developer of grade B office space expects to clean up from a price surge in secondary office space it tips at 30 per cent next year. Such statements would have seemed ridiculous just months ago. But being a property bull is now fashionable. Market expert Peter Churchouse recently added his voice to the chorus. Central to the argument is an influx of Chinese firms forming offices in the decentralised office districts. The number of new multinational firms likely to set up shop is limited by the fact that most are already here. Mainland demand for office space is predicted to drive rents higher, in turn supporting capital values upwards as lower interest rates allow softer yields. But the debate does not rest on the wide open question of Hong Kong's future after the handover. During the 1993-94 price surge, commercial property yields fell to unheard lows of about 3 per cent, compared with an historical average of 8 to 10 per cent. Subsequently, office rents stagnated and the fall in capital values pushed rental yields up to 6.5 per cent. Where next? Without rental growth - or at the very least the expectation of rental growth - capital values are going nowhere fast. Rents depend on actual demand from actual tenants. To date the mainland influx has not happened, with recent lettings seeing Chinese firms moving offices rather than new entrants to Hong Kong, according to agents. The last office boom was driven by Chinese flight capital entering Hong Kong and the build-up of international companies, particularly banks, setting up China-focused operations. Prices spiralled on relatively low volume as strata-title investors traded properties on the margin of a market largely owned by the major developers. Most of the new supply was for rent only as developers held on to their investment. This explains the ease with which Hong Kong weathered a 50 per cent drop in office values, with the real casualties being highly leveraged speculators. Much of the new supply coming on-stream over the next two years will be for sale. Capital values will not only feel downward pressure from the transmission of lower rents but through developers selling properties. Core Central can expect to outperform the decentralised office areas due to the relatively tight supply conditions but will not be completely immune from a generalised downward trend in prices. The property market is dominated by a triumvirate of parties with vested interests in rising capital values - developers, bankers and agents/analysts beholden to developers through client relationships. Expect many more announcements of an imminent boom, but remain sceptical throughout.
