No chance of Grade A office yields compressing further

In line with search for opportunistic returns.

Given that most prospective purchasers in the Hong Kong office market are seeking higher opportunistic returns, it is believed that Grade A office yields cannot compress further and expect yields to start softening in the short term.

According to a research and forecast report from Colliers International on 2Q 2014, investors are likely to shift their focus and try to secure assets that will provide opportunistic returns through refurbishment and repositioning of tenants.

Colliers International said it anticipates that the market for assets which offer this potential will attract a high level of interest, and that some investors will expand their search for these opportunities to decentralised areas.

Here's more from Colliers International:

Overall Grade A office investment yields hovered at about 2.9% in 2Q 2014, significantly below the long-term average of 4.6%.

The higher risks stemming from the combination of a projected rising cost of financing and the compressed yields that the Grade A office market currently offers will add pressure on prices of these assets to adjust.

Presently, the sustained low interest rate environment and the strong capitalisation and debt serviceability of vendors have enabled them to abstain from selling assets at a discount.

The mismatch between vendors and purchasers’ expectations has resulted in a substantial decline in transaction volumes, particularly in the strata-titled sales market.