Hong Kong office assets boosted by mainland Chinese investors, says "Emerging trends in real estate® Asia Pacific 2017"

Hong Kong, 14 Nov 2016

- In Hong Kong, a wave of incoming capital from mainland China has been picking up office properties both big and small, despite high prices. This is according to Emerging Trends in Real Estate® Asia Pacific 2017, a real estate forecast jointly published by the Urban Land Institute (ULI) and 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. "

"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.

The top five markets for investment and development in 2017:

  • Bangalore (first in investment and development)

    - The big story for investors has long been the city’s role as India's main hub for the business process outsourcing (BPO) and IT industries. There is huge demand for space as both domestic and international companies flock to open call-in and research-and-development centers.

  • Mumbai (second in investment, third in development)

    - Mumbai's geography has prevented easy expansion of the city's metropolitan area, which has made it both the most expensive city in India and the slowest growing. A major road and rail infrastructure program will allow easier access to the center from outlying areas, with most construction scheduled for completion before 2019.

  • Manila (third in investment, fourth in development)

    - The Philippines continues to attract positive comments, with its vibrant economy led by a booming BPO market and strong remittances from overseas workers. Today, the fundamentals appear as strong as ever. Demand is resilient and vacancies remain low. Office capital values and rents continue to show good growth.

  • Ho Chi Minh City (fourth in investment, second in development)

    - Vietnam is one of the fastest-growing economies in Southeast Asia and is probably the most popular real estate investment destination. Capital comes from numerous sources, but in particular from Japan, Singapore, and Hong Kong.

  • Shenzhen (fifth in investment, fifth in development)

    - The major recent talking point for Shenzhen has been its residential sector, where prices soared more than 40 percent year-on-year in the first three quarters of 2016-the fastest in the world. On the commercial side, office rents have been on a steady upward trajectory for years and are now double their level in 2009.

Other findings from the report include the following:

  • Core assets continue to be the favoured asset class

    , although product is becoming increasingly hard to source. One way around this is for investors to assume development risk by pursuing "build-to-core" projects. Although these are not traditionally considered a core strategy, many core investors are now willing to adopt this approach, especially when it involves buyers such as insurance companies that are likely to be long-term holders of the end product.

  • Investors with a mandate for higher return strategies continue to migrate up the risk curve

    , both in terms of sectors-pursuing niche strategies such as sub-logistics facilities or data centers-and geographically, with emerging markets such as India drawing increasing attention.

  • Investments in metropolitan areas have become a popular theme

    given ongoing trends of urbanization, land shortages in city centers, and low returns from central business district projects. Cities across Asia Pacific, including Sydney, Shanghai, Mumbai, and Jakarta, are engaged in major transportation construction projects that link suburbs or satellite towns to city centers.

  • In line with markets in the West, Asia is embracing the shared economy

    . The last 12 months have seen huge growth in the adoption of shared workspaces, either as standalone businesses that rent open-plan office facilities to individual or corporate users, or on a corporate basis, as large companies scrap conventional office layouts and embrace hot-desking and collaborative working environments. On the residential side, shared spaces are also becoming more prominent as rising prices continue to shrink apartment footprints.

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