Murray Road Carpark Sale Impacts Owners, Occupiers
The Murray Road Carpark site was bought by Henderson Land Development for HKD23.28 billion. This building is likely to be developed to suit the price tag, falling within the premium end of the market where there is currently strong pent up demand.
The Murray Road Carpark in Central was arguably Hong Kong's land sale of the year. For months, the market had been closely watching for clues to the outcome of the government tender for the hotly contested site. Interest among both local and mainland Chinese developers was especially high because the land was the first commercial plot to be released in Central in two decades.
Defying analyst expectations on two accounts, the Murray Road Carpark sold for HKD 23.28 billion or HKD 50,065 per sq ft (psf). That currently makes it the most expensive site in terms of unit rate, although in lump sum terms the figure has already been beaten. Just two weeks after the Murray Road sale raised the benchmark, Nan Fung Development topped the record price, after being awarded a commercial site in Kai Tak for HKD 24.60 billion, although that sale came with a more modest unit rate of HKD 12,864 psf.
Most market watchers anticipated the Murray Road Carpark site would be awarded to a mainland owner-occupier. In the end, the site was acquired by Henderson Land Development, a land-rich, Hong Kong developer who plans to turn the 31,000 sq ft site into a single landmark Grade A office building with around 20 floors by 2022. The tower will feature retail facilities and a public carpark—as stipulated under the 50-year title deed—which will most likely be located underground.
The developable space―a maximum GFA of 465,000 sq ft―would allow for a modern building comparable in size to Three Pacific Place in nearby Wanchai, according to our Head of Research, Denis Ma.
Taking into account the anticipated construction costs and developer's profit, the new development would be priced in the range of HKD 63,000–66,000 psf.
Henderson can afford the expense since it completed the sale of its 27-storey Golden Centre office block in Sheung Wan to an undisclosed buyer for HKD4.4 billion at the end of 2016, booking an estimated gain of HKD1.996 billion.
In the lead up to the Murray Road Carpark sale, other strata-titled units changed hands at near record high unit prices. These recent transactions included a unit at Convention Plaza in Wan Chai that sold for HKD 265.2 million or HKD 31,805 psf, the second highest unit price in the building. Currently, commercial office properties in the vicinity of the Murray Road Carpark site are trading in the range of HKD 25,000–40,000 psf.
"Speculation about the site's selling price, along with a tight vacancy environment, has seen capital values increase by 11% since the site was put on the government's FY2016/17 Land Sale Programme in early 2016," notes Ma.
"At this acquisition price, we calculate that upon completion, offices in Henderson's landmark development will command monthly rentals in excess of HKD200 psf, equivalent to a rental yield of about 3%."
It appears the developer is bullish that the market is strong enough to absorb rentals at these previously unheard of levels, although tenants not engaged in the city's high growth business sectors may consider such rentals extravagant at present. By the time the flagship tower enters the market, however, the price may seem reasonable.
Monthly rents at Two International Finance Centre, arguably Hong Kong's most expensive office building, are already at HKD 180 psf. There is also pent up demand for space in Central among mainland banking and financial firms eager to establish a premium headquarters in Hong Kong.
Ahead of the site's sale, Central's office rents grew to HKD115.7 psf per month in April. The vacancy rate of prime Grade A office buildings in Central currently stands at just 0.6 per cent.
"This acquisition could provide further impetus to rental increases in Central where overall vacancy is at an incredibly low 1.7% and demand remains steady at the top end of the market," says Alex Barnes, Head of Hong Kong Markets.
However, transaction volumes in the office investment market are now expected to taper off in the wake of the Murray Road Carpark sale.
"Supply of commercial buildings in the investment market will likely be temporarily suspended while owners stop to conduct a fresh valuation of their assets," predicts Ma.
The record site sale price is also having a ripple affect across the whole of Hong Kong's commercial property sector. Ma is quick to point out that mainland Chinese companies will continue to soak up the supply in Central, especially on the harbour front where trophy assets can help build their brand credibility both domestically and internationally. Some multinationals, on the other hand, will choose not to absorb the subsequent rental hikes, and will continue to move out.
"The Central-Wan Chai Bypass that will run from IFC to Victoria Park in Causeway Bay will continue to drive decentralisation to Hong Kong East," emphasises Ma.
But we haven't seen the end of Central's office supply just yet. "There is a site next to IFC that is larger than the Murray Road Carpark," concludes Ma. "In the coming years, we may see the rise of several commercial buildings there that will appeal to mainland financial firms keen to establish a reputation on the world stage."