An upsurge in third-quarter activity shook awake Hong Kong’s property investment market, as lower average pricing and higher deal volume signalled a meeting of minds between buyers and sellers.
According to the latest research by Colliers, investment volume across all real estate sectors totalled HK$41.1 billion ($5.2 billion) in the July-September quarter, a 133 percent leap from the preceding three months and a 119 percent rise on the year-earlier period.
Funds accounted for 72 percent, or roughly HK$29.6 billion ($3.8 billion), of transaction volume in the third quarter, which saw an increase in assets put up for sale amid higher interest rates and a market rebalancing in mainland China.
“The sharp US Fed interest rate hikes have lengthened investors’ decision-making process as they tended to wait-and-see, reducing the number of deals in the market,” says Kathy Lee, the recently appointed head of research at Colliers in Hong Kong. “However, as the market gradually digests the rate hike news, and the government also relaxes the city’s quarantine measures, we expect investment sentiment will pick up in Q4.”
CK Asset’s Shock Sale
En-bloc residential made up 53 percent of investment transaction volume in the third quarter, with almost the entirety stemming from a single deal: CK Asset’s surprise sale of the 21 Borrett Road luxury project in Mid-Levels to Singapore-based wealth manager Sino Suisse for HK$20.8 billion.
Other big-ticket transactions during the period included US private equity firm Ares Management’s purchase of a 51 percent stake in New World Development’s 83 Wing Hong Street office project in Cheung Sha Wan for HK$3.08 billion, as well as the HK$7 billion sale of the Goldin Financial Global Centre in Kowloon Bay to an undisclosed buyer.
The industrial sector, typically a popular segment among investors due to robust demand for cold storage and data centres, recorded just HK$2.6 billion in third-quarter deal volume, plunging 73 percent from the previous three-month period.
In terms of geographic origin, overseas buyers accounted for 71 percent of deal volume during the third quarter as local buyers made up 9 percent. A mere 1 percent was attributed to mainland Chinese buyers, while 19 percent was ascribed to unknown parties.
Colliers expects local buyers to snap up core-district street shops to take advantage of a rebound in asset values once the border with the mainland is reopened, while industrial assets should continue to attract institutional investors.
“However, due to the sharp US rate hikes, investors expect higher cap rates to offset extra interest expenses,” Lee says. As of August, average property yields ranged from 2.5 percent for Grade A office buildings to 2.9 percent for industrial assets.
Office Leasing Normalises
With the fifth wave of COVID-19 in retreat after damaging first-half sentiment, Hong Kong’s office leasing market began to normalise in the third quarter. Average monthly rents fell 1.5 percent in key office submarkets compared with the prior quarter’s levels, to HK$57.90 per square foot, as vacancy rose 1.4 points to 12.6 percent.
The ongoing trend of decentralisation stood out in Kowloon East, which was the only major submarket to record a sequential rent increase in the quarter (albeit a marginal 0.9 percent uptick). “We expect rents will bump along at the current level until the end of 2022,” Lee says.
A flight to quality within districts meant that office relocations weighed most heavily on the rent and vacancy figures of down-market assets. For instance, US-based Invesco moved from Champion REIT’s Three Garden Road to a 32,000 square foot (2,973 square metre) space at a higher-profile Central building, Hongkong Land’s Jardine House.
For 2023, Colliers projects a pipeline of 3.3 million square feet of new Grade A office supply. “With more new and high-quality options, we expect flight-to-quality moves will further polarise Grade A vacancy within the same district, reflecting the significant variation in building quality,” Lee says. “Landlords should consider upgrading their properties, such as applying ESG framework to improve property value, to attract and retain tenants.”
The scrapping of hotel quarantine for inbound visitors in late September showed the government’s willingness to move towards a full border reopening, which should drive office leasing demand from multinational corporations.
New Reality in Residential
Given the local currency’s US dollar peg, the Fed rate hikes have driven Hong Kong’s interest rates to nearly 2.5 percent, their highest level since 2008. The resulting rise in mortgage rates is weighing on the cash flow of future homebuyers, who will need more income to apply for high loan-to-value mortgages.
The widening price expectation gap between buyers and sellers led to transaction volume in the second-hand residential market plummeting 32.3 percent in the second quarter, compared to the same period last year. Based on actual transactions, Colliers observes that residential sellers are accepting the new market reality and are open to lowering their asking prices.
“We foresee residential prices adjusting faster in Q4 2022, considering the current cycle of interest rate increases will likely persist through 2023,” Lee says.