Hong Kong, China investors hold fire over Vancouver commercial property, but prices unlikely to crash, analysts say
- Hong Kong, mainland China buyers have invested C$2.8 billion in sector from 2016-18
- Investors are anticipating a decline in residential prices will also bring down commercial property prices
Foreign investors, including those from Hong Kong and mainland Chinese, largely stayed out of commercial real estate in Vancouver, Canada’s second-largest investment market, in the first half of 2019 amid sinking home prices in the city.
“Market participants seemed to be waiting for the next shoe to drop. With single-family homes and commercial properties competing for land, the thinking is that the decline in residential prices will bring down land values, and in turn bring down commercial property prices to the same degree as residential assets,” said Jim Costello, senior vice-president at data provider Real Capital Analytics (RCA).
Residential prices in Vancouver and commercial real estate in wider British Columbia have generally mimicked each other, and with prices of detached homes falling 14 per cent from January 2018 to May this year, many fear commercial property will decline by as much.
From the end of 2018 to May this year, commercial property prices in British Columbia were down a cumulative 1 per cent.
Data from RCA shows that investment into the segment in the first half amounted to C$2.7 billion (US$2.03 billion), of which C$1.7 billion was by domestic investors and the rest from the US.
The lack of investment from this region in the period contrasts with recent years – Hong Kong and mainland China investors have invested a combined C$2.8 billion from 2016-18. The decline also follows capital outflow curbs introduced by Beijing, rolled out in late 2016, and the slowing economies of China and Hong Kong amid the trade war with the US.
But analysts remain bullish about Vancouver commercial property.
“While further softening in the residential market is anticipated, this should not translate into weaker commercial real-estate prices or values. It would take a significant loss of jobs in the Vancouver region to have a notable impact on commercial real estate, and this is not likely to happen,” said Stuart Barron, national director of research, Canadian markets, Cushman & Wakefield.
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“From 2015 to the second quarter of 2019, demand for office space in downtown Vancouver increased by more than 400 per cent above historic quarterly averages, ” Barron said.
Vacancy dipped from 11.5 per cent to 1.5 per cent between the first quarter of 2016 and the second quarter of 2019, driving net rental rates to increase by 32.4 per cent.
Industrial absorption has averaged 3.5 million square feet since 2015, driving the overall vacancy rate to 1.7 per cent, one of the lowest in North America.
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Prices per unit of high-rise flats has risen to about US$350,000 currently from US$191,000 in as recent as 2014.
“Supply and demand dynamics, including record low office and industrial vacancies combined with land constraints that limit construction, remain supportive of commercial property fundamentals and values,” CBRE said in an emailed response.
Despite 4.1 million square feet of new office space set to be delivered by 2023, “tight market conditions are expected to persist over the next several years”.
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Prices of detached homes in Vancouver and commercial real estate in British Columbia rose by an annual 6 per cent from 2005-14 on a compound basis, according to RCA. From 2014-17, trends diverged with single-family home prices in Vancouver growing 17 per cent compounded annually, while commercial property in British Columbia rose at an estimated 11 per cent compounded yearly.
In 2016, British Columbia introduced a foreign homebuyer’s tax of 15 per cent and raised it to 20 per cent in February this year. While prices of detached homes fell, commercial property prices in British Columbia climbed a cumulative 7 per cent in the same period.
