Hong Kong’s landlords rush to put offices up for sale, but are they already too late?

Hong Kong’s landlords are putting a record number of office space on the market, encouraged by a sale in May of the Murray Road car park that successfully set a benchmark for commercial property prices in the world’s most expensive real estate market.

The number of transactions have risen three quarters in a row to a record in the three months ended June, with HK$13.7 billion of office space changing hands, more than double the deals in the previous quarter, according to data by Colliers International.

The turning point was on May 16, when Henderson Land Development won a government tender for the Murray Road car park building, agreeing to pay HK$23.3 billion (US$3 billion), or HK$50,064 per square foot, for the right to build an office tower on the largest piece of commercial land in the centre of Hong Kong. That was a shot in the arms for the landlords in surrounding properties, who raised their prices immediately by between 10 and 15 per cent, agents said.

Money buys Chinese tenants the cachet of the Central address

“Office space that was asking for HK$39,000 per sq ft before the Murray Road sale rose to HK$50,000 per sq ft, or even more,” after the record was established, said Knight Frank’s consultancy head Thomas Lam.

And landlords that wouldn’t have been in the market came out of the woodwork to take advantage of the buoyant prices. The Excelsior Hotel in Causeway Bay, which first opened in 1973, was offered for sale, for conversion into an office tower. The Lo family, in the middle of a bitter dispute over their late patriarch’s estate, decided to put the Great Eagle Group’s Langham Place office tower in Mong Kok up for sale, as did Nan Fung Group with the Octa Tower in Kowloon Bay. The three properties can each fetch between HK$50 billion and HK$65 billion, agents and valuers said.

“We believe the office property price will keep moving up, but at a slower pace as we are getting closer to the peak,” said Daniel Shih, director of Research at Colliers International.

With prices at such lofty heights, agents and landlords are looking to deep-pocketed buyers from mainland China to absorb the space that’s coming on to the market.

HNA Group, the owner of the Hilton Hotels group and of Hong Kong Airlines, had splurged HK$27.2 billion over four months on four pieces of residential land at the former Kai Tak airport site. They would’ve been a natural customer to buy at least one of the office towers up for sale.

However, HNA and other large Chinese conglomerates had been placed under increasing regulatory scrutiny since April for their outsize dealmaking and aggressive acquisitions, on concern they may be taking on way too much debt than China’s financial system can handle.

President Xi Jinping and his ruling Communist Party are anxious to maintain economic and political stability as the party heads into a crucial meeting this autumn to pick a lineup of leaders for the next five years.

Thank you Henderson: Record Murray Road price lifts values in the neighbourhood

HNA, which said it had prepared a tender document for the Murray Road plot, didn’t actually submit its bid.

Property agents better prepare for a period of stagnation, as the combination of China’s capital controls and government scrutiny on overseas investments means “there’s less likelihood of another large investment deal by mainland Chinese companies in 2017,” said Collier’s Shih.

That may leave Cheung Kong Property (Holdings) in a bit of a pickle. The flagship company of Hong Kong’s wealthiest man Li Ka-shing had seen the record price looming, and had put its 73-storey office tower called The Center on the market as early as last year.

A number of mainland Chinese companies including HNA and the Industrial & Commercial Bank of China had reportedly shown interest, but balked at the asking price of HK$35 billion, which included many subdivided (or strata title) owner-occupiers in the building, agents said.

“Property deals worth more than HK$20 billion are chasing mainland investors,” said Knight Frank’s Lam. “But deep-pocketed mainlanders are facing a challenge to buy offshore assets.”

The shifting dynamics in mainland China may keep many potential buyers on the sidelines. At least mainland Chinese companies have more flexibility and freedom when then invest in the land market, analysts said.

“ We are seeing mainland investments into the land market has increased substantially since the third quarter of 2016 while mainland investment in properties slowing down,” said Shih. “This reflects the fact that the Chinese authority is more concerned about overseas real estate investments by mainland companies when real estate does not form part of their main business.”

Additional reporting by Lam Ka-sing.