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News Special


Office Investment Demand Rises Despite Low Yields and Record Prices

Local investors and owner-occupiers look for longer-term asset value


Headline-grabbing deals—like the sale of Central's Murray Road Carpark to Henderson Land Development, and that of a commercial site in Kai Tak, snapped up by Nan Fung Development for a record HKD 24.6 billion—have seen sentiment in Hong Kong's commercial property investment market shift dramatically. They have reset capital value benchmarks and sent a message to the market that rentals still have plenty of room to grow.

Commercial property investment is expected to gain momentum in the second half of 2017, as investors redirect funds from the residential market. Office investment is strong—accounting for 50% of total property investment in the first half of the year. Although China's controls on capital outflows have side-lined larger mainland Chinese investors, the slack in the market has been taken up by renewed interest among local investors, developers and owner-occupiers.


We forecast capital values of Grade A offices will rise by 15-20% in 2017 against a rental growth of 5-10% in Central, and an overall rental increase of 0-5% given the tight vacancy supply across Hong Kong. 

"We forecast rents to flatten out and retreat by less than 10% through 2018 and 2019 as new supply weighs on the market," says Denis Ma, our Head of Research. "Rental markets should then return to growth though we don't anticipate big jumps in rents across the office market."

The prices of all government land sites sold recently have been above the prevailing prices for built buildings in the area. At HKD 50,000 per sq ft (psf), the Murray Road Carpark site, which sits on the fringe of Central, is higher than some built properties in the heart of Central. 


If you factor in construction costs and a development margin, Nan Fung's future development in Kai Tak will be priced at about HKD 20,000 psf, which is HKD 8,000 psf higher than new buildings currently being sold in the district. Alternatively, assuming a cap rate of 3%, rents would be priced at about HKD 70 rent psf. Current rents in Kowloon East run at only HKD 30 psf. 

"Investors are attracted to Kai Tak and Kowloon East because they see the potential in these areas as they develop into Hong Kong's second central business district," explains Ma. "Completed buildings in Central are selling on average for HKD 30,000-35,000 psf, and Nan Fung bought the site for just HKD 12,000 psf—it makes the site look like a bargain."

Record land sale prices have pushed yields down to very low levels—Grade A office yields were at 2.9% in 1H17—but that hasn't deterred buyers from entering the market. 

"The office sector has drawn considerable interest from investors because vacancy is tight in core areas. We believe the sector will continue to attract interest even with short-term vacancy levels rising on the back of the completion of new supply," says Ma. 

We are seeing a great deal of interest from local investors with budgets of HKD 1-2 billion, as well as potential owner-occupiers who take a longer-term view of their investments and want to follow in the footsteps of Citi and Manulife in securing their own building and naming rights. 

"For these types of investors, low yields and short-term rental market performance aren't of greatest concern because they will occupy the buildings themselves," explains Ma.

More recently, though, there has been a lull in mainland Chinese investment. "Chinese investors are stuck on the fence now because of the capital controls, but they will come back to the market once these are eased," predicts Ma. 

The effect of Beijing's policy to vet overseas real estate investments was felt in the first half of this year when mainland Chinese buyers accounted for just 7.6% of office investment in Hong Kong, down from 30% in 2016. Without the sky-high prices mainland Chinese buyers are famed for paying, overall commercial sector investment volume is likely to fall this year. However, the market is still expected to be very active with the number of smaller transactions—HKD 100 million or less—having surged 51% year-on-year by mid-year.


"Right now, the best Grade A building investment opportunities are in decentralised areas, where the potential for value growth is higher," says Ma. "We are upbeat about the long-term prospects of Kowloon East and Wong Chuk Hang, as well as Cheung Sha Wan, where New World Development bought two government land sites earlier this year for HKD 11.8 billion." 

Grade B office buildings in Central with floor plates of less than 5,000 sq ft are also worth watching. These are attracting significant interest from local institutional investors, who see an opportunity to tap rising demand for co-working space. Co-workers are willing to pay rents of HKD 50 psf, a premium of HKD 10-20 on average Grade B office rentals.

"Suddenly, you have a new group of potential tenants, who can absorb higher rents in those buildings and lift yields," adds Ma. 

For more information on the latest Hong Kong real estate market trends, visit our Research Hub or contact Denis Ma

For more information on office investment sales and acquisitions, please contact Joseph Tsang.