Published May 16, 2009

HK office market shows signs of recovery

Investors, end-users eye good value in prices, which are almost half their peaks last year. By Uma Shankari

HONG Kong's office market is showing signs of life again, after almost a year in the doldrums.

About 120 office sale transactions were registered in March, representing a rise of more than 80 per cent from the previous month and the highest level in six months, according to data from Knight Frank. End-users and long-term investors are entering the market again, eyeing good value in prices that have fallen almost 50 per cent from their peaks in 2008.

Also in March, the average price of Grade A offices in Hong Kong increased 1.8 per cent month on month, after having fallen for 12 consecutive months.

While prices in Wan Chai and Causeway Bay stabilised, a mild recovery in prices was seen in other business districts. Sheung Wan led the market with a price gain of 3.6 per cent, followed by 3.1 per cent in Central and 1.8 per cent in Admiralty.

'The prices of several office buildings in core areas staged a strong rebound over the month,' Knight Frank observed in a report. 'For instance, a mid-floor unit and a low-floor unit in Lippo Centre in Admiralty were reportedly sold for HK$8,900 (S$1,685) and HK$8,700 per square foot (psf), representing a rise of 15.6 per cent and 13 per cent respectively from the previous month.'

The increase in the sales could have been helped by bank financing being more easily available in the market in Q1 2009, as compared to the last few quarters of 2008.

In a recent market bulletin, Colliers International noted that one key hurdle for investors was the availability of bank loans. However, the market can expect to see an improvement soon as the local banks in China have recently become more active in offering financial packages. Bank valuations are gradually getting closer to asking prices in the market.

However, while transactions might have picked up, most analysts do not have hopes that the capital values and rentals of office space will recover. The problem, said one observer, is not just the current economic situation. Even if Hong Kong's economy starts to recover, the market will still face a problem of oversupply. The same holds true for Singapore.

Taking a bearish view, Jones Lang LaSalle (JLL) recently said that it expects rents and capital values of Hong Kong's office space to hit a trough only in 2010. Rental values are expected to fall 55-65 per cent from their peaks, while capital values are expected to fall 40-50 per cent.

JLL's scenario for Singapore is worse - the office market here is expected to hit its trough only in 2011. Rental values for Singaporean office space is expected to fall some 70-80 per cent from peak to trough, while capital values are expected to fall some 60-70 per cent. Supply imbalances will drive large vacancy increases in both Singapore and Hong Kong, according to JLL.

Singapore and Hong Kong continued to suffer the sharpest declines among all Asian markets in Q1. According to data from CB Richard Ellis (CBRE), Singapore saw an 18.6 per cent drop in office rents while in Hong Kong, overall office rents declined by 14 per cent quarter on quarter.

For Hong Kong, the prevailing trend of corporate downsizing and cost rationalisation will cause rents and capital values to fall further over the next 12 months, Colliers said.

Noted CBRE in its Q1 market view research note: 'A number of hedge funds in Hong Kong were observed to be considering subleasing and surrender options during the quarter, while landlords remained under significant pressure to lower rents even further.'

And although bank financing is becoming more readily available in Hong Kong, as far as prospective investors are concerned, the yield spread between real estate investment yields and banks' lending rates continued to expand in Q1 2009 - signifying that investors had factored in a thicker risk premium in their bids.

Despite the fact that the three-month Hong Kong Interbank Offered Rates (Hibor) - the commonly used benchmark for borrowing rates - fell further by more than 100 basis points in Q1 2009, real estate investment yields in the office and industrial property market in fact edged up more than 50 basis points during the quarter.

However, Colliers advises that long-term investors could still consider investing in prime office buildings in Central/ Admiralty, given that the prices for strata-title office space there have decreased by about 45 per cent from the peak price of HK$26,112 psf in July 2008.

The other investment opportunity is in development sites. 'Since land owners bear no income with their bare sites, they see certain pressure to sell and many will be open to price negotiation,' Colliers said.

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