Investors switch to Hong Kong office property market amid troubled outlook for retail sector

Institutional investors are diverting their capital to Hong Kong’s office property market in the wake of a troubled outlook for the retail sector, where yields have been compressed by soaring asset prices.

Property consultants expect more big-ticket transactions to emerge in the office investment market over the next 12 to 18 months, with investors targeting en-bloc sales.

John Davies, an executive director of the Hong Kong institutional investment properties team at property consultant CBRE, said interest in office properties was increasing, given that the retail sector was heading for a correction and the mass residential market was under pressure.

The office sector had become sought after by both investors and end-users because it had offered “stable but steady growth in rental income” since 2010, he said.

The solid fundamentals of the office sector, including a low vacancy rate and a lack of major new supply from now until 2020, made investors more confident, Davies said.

“It is quite interesting to see [office demand from] the financial sector in Central has not grown, but the insurance sector, global sourcing firms and engineering consultants doing a lot of regional infrastructure projects have been expanding in decentralised locations in the past decade,” he said.

For instance, Kowloon Bay was becoming a favourite address among multinational corporations setting up headquarters in Hong Kong.

There has been chatter in the market that an investor is in talks with Swire Properties to acquire an office project in Kowloon Bay for an estimated US$1 billion. If the deal eventuates, it would be the biggest office transaction in Hong Kong.

In a stock exchange filing on August 30, Swire revealed it was considering selling its entire interest in a wholly owned subsidiary that holds an office development project in Kowloon Bay.

Swire won the 46,235 sq ft site in November 2013 in a government tender for HK$2.6 billion, or HK$4,753 per square foot. The project is scheduled for completion in 2017.

Jonathan Lai, an associate director at Ricacorp Properties, said there was a limited number of quality en-bloc office projects available for sale on the market.

“Investors are willing to pay a premium for it,” he said.

Lai said the Kowloon Bay project could prove attractive to real estate funds looking for stable income for three to five years.

Davies expects more large deals in the next 12 to 18 months.