Hong Kong is worst major city for office investment yield, prompting local investors to look overseas

Hong Kong ranked dead last in terms of office investment yields in a survey of 54 markets worldwide, a trend that has prompted local investors – including the city’s wealthiest man Li Ka-shing – to look abroad for property investment opportunities.

The city offered Grade A office yields of 2.71 per cent as of June this year, making the properties less attractive investments when compared with the world’s gateway cities such as Sydney (5.62 per cent), Los Angeles West (4.77 per cent), San Francisco (4.64 per cent) and New York (4.15 per cent), according to a research report by property consultant Savills and Deakin University in Australia, which was released on Wednesday.

The report, titled “World Office Yield Spectrum”, compares 54 major office markets across Asia, Europe, the United States and Australia.

London’s West End ranked the second lowest with a market yield of 2.8 per cent, the only other market to record a below 3 per cent yield with Hong Kong. Ho Chi Minh City and Hanoi offered the highest yields at 9.3 per cent and 9 per cent respectively, but those numbers reflected a perception of greater investment risk, according to the report.

Analysts said the low yields in Hong Kong explain why local investors are shifting investments outside the city.

“The office market is currently very toppish and it would make sense for those looking for yield to sell and buy elsewhere,” said Denis Ma, head of research at JLL.

Li’s Cheung Kong Property (CK Property) is selling its tallest office building, The Center at 99 Queen’s Road on the fringes of Central, with an asking price of HK$35 billion.

Hong Kong office market to be dominated by buyers from China

“If the selling price is good, it is sensible to sell the Hong Kong asset and use the proceeds to invest in overseas properties which have higher yields,” said Thomas Lam, head of valuation and consultancy for property consultant Knight Frank, referring to the potential sale of The Center.

CK Property, which also owns the Cheung Kong Center office building on the site of the former Hong Kong Hilton hotel in Central, earlier this month unveiled plans to explore investment opportunities in overseas markets.

“CK Property mentioned its property-related or new business areas to generate recurrent income in the future,” said Alfred Lau, property analyst at Bocom International Securities.

The company did not elaborate on overseas investment plans but admitted that land acquisition opportunities in Hong Kong were limited, said Lau.

CK Property did not acquire any new land during the first half of 2016 due to high land prices in Hong Kong and China.

Cheung Kong puts The Center up for sale as Li Ka-shing trims Hong Kong assets

Fitch Ratings said overseas investments may help diversify CK Property’s portfolio and support the Hong Kong company’s credit rating.

CK Property’s leverage, as measured by net debt/investment property value, declined to 6 per cent at the end of June 2016 from 14 per cent at the end of 2015. The company continued to generate stable rental income (excluding joint ventures and associates) worth HK$3.6 billion in the first half of 2016 from its high-grade Hong Kong investment property portfolio, as well as strong contracted sales of HK$26.5 billion from property developments in Hong Kong and mainland China, according to Fitch.