China acquiring office properties left and right in Hong Kong despite high prices

Incoming capital has boosted HK office assets.

In Hong Kong, a wave of incoming capital from mainland China has been picking up office properties both big and small, despite high prices.

According to a release from PwC, assets in Hong Kong have been off the radar in recent years because of their high prices, but Hong Kong commercial transactions rose some 17 percent in the first half of the year, according to real estate data and analytics company Real Capital Analytics (RCA).

The buying spree has been mainly driven by mainland Chinese corporate players, often on the hunt for trophy assets rather than pure investments. Some international investors also voiced renewed interest in Hong Kong assets; but with more mainland buyers rumored to be lining up for major single-building acquisitions – if and when they appear – competition will be stiff.

“Over the last 12 months, Hong Kong has been a target for a long list of mainland Chinese enterprises looking either to buy trophy assets or to secure Grade-A rental space in the central business districts (CBDs),” said KK So, Asia Pacific Real Estate Tax Leader, PwC.

“New rental space of Grade-A and Grade-B office stock in the core CBD areas was largely secured by mainland companies last year. This played a major role in pushing rents up and driving established businesses out of the CBD. One result has been continued migration to Hong Kong’s secondary business hub in East Kowloon, which we expect to be a very competitive market for the next couple of years.”

Here's more from PwC:

“The real estate market in Hong Kong is robust and prices are relatively high but still we are seeing strong demand from foreign capital, especially from Mainland China,” said Raymond Chow, member of ULI Global Board of Directors, and Executive Director, Commercial Property of Hongkong Land Limited. 

Looking at the Asia Pacific region, low transaction volumes in the first six months of 2016 are due to owners opting to refinance properties at lower rates instead of selling them. In general, investors are reporting fewer overall transactions but bigger ticket sizes. Yields are falling but, looking forward, while most investors see potential for some further compression - mainly as a result of the sheer weight of new capital being pointed at the sector - the trend may be reaching its limit.

“This year’s Investment Prospects survey shows a strong shift away from last year’s favorites, which featured core markets in Japan and Australia. Instead it favors emerging-market destinations, with two Indian cities topping a list which also includes Vietnam, the Philippines and Shenzhen. It is also notable that several gateway cities are in the bottom half of the list – indicating their declining popularity,” said Mr KK So of PwC. “Although demand for core assets in gateway cities remains strong, buyers are struggling to source investable assets at acceptable prices that deliver higher returns. Increasingly, those returns are most evident in emerging-market destinations. Last year’s survey results showed a ‘flight to safety’ approach. This year’s results, with four emerging-market destinations as the top choices, reflects a very different mandate — a ‘quest for yield’.”

Emerging Trends, which is being released at a series of events across Asia over the next several weeks, provides an outlook on Asia Pacific real estate investment and development trends, real estate finance and capital markets, and trends by property sector and metropolitan area. It is based on the opinions of 604 internationally renowned real estate professionals, including investors, developers, property company representatives, lenders, brokers and consultants.