Hong Kong’s housing market made headlines earlier this month when home prices fell for the first time in nearly two and a half years, after an unprecedented bull run.
Now data is emerging to show that the trend in the city’s commercial market may be taking an even sharper turn as the value of transactions of offices and shops dropped by more than half during September, compared to the previous month.
The downturn in the city’s commercial market, after even B grade office spaces in aging buildings had been fetching record prices, could put pressure on speculative buyers of offices and shops in the city, including the consortium of local investors who paid a record $5.2 billion for The Center last year, and a mainland tycoon who acquired a pair of office buildings from Swire Properties for $2 billion in June of this year.
Retail Market Froze Over in September
While all types of commercial assets felt suddenly unloved in September, it was retail space that went most unwanted with the total number of transactions in the city dropping to 96 last month from 151 in August, according to data from local brokerage Midland Realty.
The downturn saw the value of retail space slide still more sharply falling 58 percent from HK$6.37 billion ($813 million) in August to HK$2.64 billion in September.
Office Deals Drop 27%
While not falling as steeply as transactions of shops and other retail space, purchases of en bloc and strata title office space fell by 27 percent in September, in terms of value, from HK$1.86 billion in August to HK$1.35 billion last month. The number of transactions fell only slightly, dropping from 132 in August to 129 in September.
The value of office transactions was the lowest recorded in any month in Hong Kong since May of 2016, when HK$1.14 billion of office space changed hands in the city.
Commercial Market Slides for Third Straight Month
Overall, the value of transactions in Hong Kong’s commercial market, including retail and commercial, was down by 51 percent in September, falling to HK$3.99 billion, from HK$8.23 billion in August.
Last month’s slide was part of a three month cooling in enthusiasm for commercial and industrial assets in the city, with the number of non-residential property transactions falling each month of the quarter, after reaching record levels during the first half of this year.
Average prices for office assets climbed 17.5 percent in 2017, and grew another 10.8 percent in the first half of 2018, according to JLL. One study by consultancy Cushman & Wakefield found that, driven largely by investors from mainland China, transactions of commercial properties with price tags of HK$100 million and above jumped to HK$44.79 billion during the second quarter of 2018, up by 136 percent compared to the same period one year ago.
Slowdown Puts Strata Speculators at Risk
With concerns over the US-China trade war, rising interest rates and falling stock markets combining to dampen investor sentiment, some of Hong Kong’s more daring buyers may find the market suddenly working against them.
The investors who teamed together to buy The Center from CK Asset last year financed 80 percent of the HK$40.2 billion purchase price through high interest bonds arranged by Morgan Stanley and Hammer Capital. The initial set of bonds carried a 7.5 percent coupon rate, while the B tranche have a coupon rate of 15.25 percent, according to an account in the South China Morning Post.
Local investor Johnny Cheung Shun-yee, one of the members of The Center consortium, in August parted with two of his four floors in the tower in August, with the 49th floor changing hands for between HK$41,331 to HK$45,689 per square foot, according to a statement by the buyer, Guangdong’s Hopson Development.
In April, when Cheung put his floors on the market, the veteran property trader had declared an asking price of HK$55,000 per square metre.
This week a privately-held affiliate of mainland investor Chen Chang Wei’s Hengli Group, which had purchased the Cityplaza Three and Cityplaza Four office towers from Swire Properties for HK$15 billion in June, has reportedly brought in a private equity investor to help finance the project.
While Hengli is said to have originally purchased the pair of office buildings in Hong Kong’s Quarry Bay with the idea of selling them off on a strata basis similar to the buyers of the Center, Hong Kong’s Gaw Capital may now have taken as much as a 65 percent stake in the project, as opportunities for bank financing rapidly evaporate.