RCA Insights

What’s Behind Hong Kong’s Surging Commercial Property Prices?

By on December 12th, 2017

Record-breaking office deals in Hong Kong have been grabbing headlines this year. A flood of capital from mainland China is one factor in the price surge, but other forces are at play too.

The latest office deal to shatter the records is the $5.1 billion (HK$40.2 billion) sale of The Center by Cheung Kong Asset Holdings, which is due to complete by the year-end. If the deal goes through, the 75% stake will be the most expensive single asset transaction, not only in Hong Kong, but globally since the early 2000s.

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Earlier in 2017 the Murray Road site sold for $3.0 billion. The deal broke the global record for the highest price paid by a developer for commercial-zoned land. (The new owner plans to build a prime office on the site.) Before that, the record belonged to Mass Mutual Tower, which was the first single office asset sold for over $1 billion in Hong Kong. Aside being the largest deal in the market at the time, it also set a new mark for the highest price per square meter paid at $50,051: now, The Center will surpass it by 20%.

The RCA CPPI (commercial property price indices) show that Hong Kong prices, being underpinned by strong demand from mainland Chinese investors, have registered the strongest growth among the leading global commercial real estate markets. Prices have tripled since the inception of the indices at the end of 2006, and grew by 20% YOY in the third quarter of 2017.

So, what’s behind the rising prices? Chinese investors have always dominated in Hong  Kong but since new capital control rules were introduced by Beijing, they have flooded the market with new capital. Since January 2016, they have spent close to $13.0 billion on office and commercial-zoned land – an 80% share of their cumulative investments in the sector in Hong Kong since 2007.

Another reason for the increased activity in the Hong Kong office market is a scarcity of land driving office demand and consequently office rents. Moreover, occupier demand for office space from mainland Chinese corporates has expanded, particularly in Central, Hong Kong’s CBD. Office vacancy is low, at around 2%. CBD rents are at all-time high and still projected to grow. This has created confidence that office rents will stay high and property income will absorb risks of increasing interest rates (as the Federal Reserve will eventually raise rates).

Despite the risks, Hong Kong remains very attractive, in particular to mainland Chinese investors. Aside from this buyer group however, many of today’s risk-averse investors will not consider Hong Kong an affordable bet.