Golden period ahead for real estate sector in Hong Kong

Last month , my colleague John Davies penned an article in the Post in which he remarked, “To establish the value of the purchase by measuring prices paid previously in the area is not comparing like with like. One must consider how an area is likely to evolve into a destination and how this translates into the alpha element of project returns, over and above the beta return delivered by the Hong Kong market as a whole.” This phrase came to mind when considering the recent residential land purchase in Kai Tak by HNA Group.

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It is my view that Kai Tak, and Kowloon East on the whole, will continue its transformation from an industrial location to a vibrant multi-use destination. However, regarding the aforementioned land sale, this alone may not explain the gulf between the price paid by the developer and market estimates prior to the announcement of the tender result. Many theories abound, and I do not intent to critique the merits of the transaction, but it is clear that other inputs also drive the investment criteria. This is not exclusive to the residential market.

Occupier demand in the office market has largely been subdued throughout the year but a two-tier market has emerged in Central since early last year. This has been driven by mainland Chinese companies, who are very specific in their requirements and show a distinct preference for certain buildings, principally One and Two IFC and Cheung Kong Centre, with isolated cases of mainland firms paying close to pre-global financial crisis rental levels to secure space in these buildings. It seems that the gravitas afforded by the addresses holds sway over cost considerations. Exchange Square is also highly desired and is a live option for mainland companies given the high occupancy rates and strong competition for space in the aforementioned buildings.

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Some may scoff at the prices paid and pour scorn on a perceived lack of judgement. However, while the durability of certain business models may be questioned, many of these companies operate off very high margins and can quite easily afford high rents. Moreover, it is their clients that value such space and it is therefore quote logical for the occupier to ensure its bid is successful.

The sheer weight of money on our doorstep is such that one can reasonably expect occupier and investment demand from mainland China to continue unabated. Authorities may put in place measures to stem the capital outflow but in reality this only serves to redirect the capital through alternate means. A similar claim can be made in relation to the recent hike in stamp duty in the Hong Kong residential market. In October 2012, following a round of government intervention to cool the property market, CBRE Research wrote in the Post, “…while the aim of the latest measures is to curb speculative activity in the residential market, some investors may now turn their attention to commercial property. As such, we expect to see a rise in investor demand for strata-titled offices and industrial units given their relatively digestible lot sizes for private investors and ease of management…..the consequences and outcomes of policy initiatives are not always predictable and can often bring about some unintended side-effects. We may see the introduction of further measures going forward and the market should therefore prepare for further uncertainty.” Four years later, these words still ring true and the commercial sector may be the unintended beneficiary from increased capital inflows.

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Economic turbulence and political woes fill the airwaves, dominate the print media and generate lively debate at many dinner tables in Hong Kong and further afield. A sense of unease is palpable, exacerbated by the US election result. However, regardless of political persuasion, we must not lose sight of the opportunities that still exist for Hong Kong in what should be a golden period for the territory. Infrastructure improvements are already transforming areas such as Wong Chuk Hang and Kowloon East, attracting the attention of large multinationals and bringing an economic dynamism to neglected locations. North Point and Hung Hom have also become the focus for a broader occupier base, both residential and commercial. Further ahead, we can expect major infrastructure works in West Kowloon and the Central Harbourfront to crystallise into greater accessibility, improved public spaces and enhanced commercial stock over the next 10 years.

It is imperative that, despite the challenges, Hong Kong retains its entrepreneurial spirit and that the government fulfils its role as a facilitator. Leaders need to ensure that, strategically and tactically, Hong Kong remains a great place to do business. We cannot rest on our laurels or reel out tried slogans about being Asia’s World City while competing locations up their game.

Rhodri James is executive director at CBRE’s advisory and transaction services – office