International Herald Tribune
03-15-2006
In early 2003, the Hong Kong property market was dead, smothered by SARS and a profound economic slump. Then word came that a Morgan Stanley investment fund was paying 843 million Hong Kong dollars, or $108 million at current exchange rates, for Vicwood Plaza, a 38-floor, commercial building covering 400,000 square feet, or 37,000 square meters, in Sheung Wan, a neighborhood next to Central. It was the first time an international investment fund had bought a whole commercial complex in Hong Kong, and the purchase started a market rebound.''The office market does tend to be the barometer,'' said Guy Hollis, Asia-Pacific head of the international capital group of Jones Lang LaSalle. ''If the office market is going well, everything tends to do well.''Increases in interest rates have been eroding Hong Kong's residential markets; retail and office properties also slowed in the second half of 2005. But industry insiders say the office market looks set for another run because of a shortage of supply and strong demand. And this would mean that another general rally is likely, Hollis said.The commercial market was solid last year, with values up 11.7 percent for Grade A office space, according to CB Richard Ellis. This year, the property agency is predicting a further increase of 10 percent in that category, which is not precisely defined by the industry but generally includes quality fittings and broadband Internet service.Investors that got in at the right time, like Morgan Stanley, have profited. Steady gains in prices, though, could reduce yields for investors trying to follow suit: The more prospective investors pay for a property, the less they stand to profit from rents. But rents have increased rapidly, leaping 55 percent in 2005, according to CB Richard Ellis, with prices expected to rise 20 to 25 percent this year. The figures suggest that commercial-property owners are benefiting from long-term capital gains and short-term improvements in yield. Analysts say the market appears set to stay strong for some time to come, partly because of the worldwide interest in China.There also are several local props that should support the market, particularly the lack of Grade A offices, especially on Hong Kong Island. A series of projects in 2003 and 2004 brought a large amount of new office space on the market just as Hong Kong was struck by SARS, or severe acute respiratory syndrome. The most prominent was Two International Finance Centre, the 88-story building that became Hong Kong's tallest when it was completed in 2003. Government figures show that a total of 5.3 million square feet of Grade A office space was completed in Hong Kong during 2003 and 2004. But the figure plummeted to 335,000 square feet last year; redevelopment of the Furama Hotel in Central into the AIG Tower was the only major project.The situation will not improve soon. April 26 will mark the end of the tender for the Hang Seng Bank Building, a 22-story, 264,000-square-foot building on Des Voeux Road, one of the few sites available for renovation or redevelopment in Central. And in October, Hongkong Land is expected to complete a 110,000-square-foot tower on its Landmark East site in Central. Even so, the pace of the next two years is half that of 2003-04. Only 1.2 million square feet of Grade A space is expected on the market this year and 1.7 million square feet in 2007.Many companies that signed multiyear leases during the SARS crisis are seeing them come up for renewal and suffering some sticker shock. But the financial tenants that make up the bulk of renters in central Hong Kong have been enjoying boom times of their own. They generally appear set on expansions, not just renewals, despite the rent increases.''We anticipated a very huge supply with projects such as the IFC Two building and the AIG Tower,'' said Buggle Lau, chief analyst at Midland Realty. ''But unexpectedly the economy picked up so fast, and the demand is so strong. So the supply again is quite limited. And, on the other hand, demand is still growing.''As a result, any existing Grade A space is being occupied quickly. Two International Finance Centre has only a few 1,000- to 2,000-square-foot units still available. The AIG Tower has just one 7,000-square-foot still empty.Over all, vacancy rates for office space in Hong Kong are at 6 percent, the lowest level in five years.Lau said tenants were being pushed into ''noncore areas,'' basically anywhere outside Central, Causeway Bay and Tsim Sha Tsui, with companies looking into farther-flung neighborhoods like Quarry Bay, West Kowloon and even Mong Kok. This change is having its own effects. According to Colliers International, rents in the Quarry Bay area rose 47 percent in the second half of last year to about 35 dollars per square foot a month. In comparison, Central rose 23 percent to about 75 dollars per square foot a month. The decentralization appears to be continuing, with estimates that 80 percent of all new Grade A office projects during the next five years will be built in outlying areas.Sun Hung Kai Properties is developing a large swath of West Kowloon that will include a 118-story tower, which is intended to usurp Two International Finance Centre's title as Hong Kong's tallest building when it is finished in 2010. The project, the International Commerce Centre, is being built in stages and will eventually total 2.5 million square feet of Grade A office space.Lo King-wai, Sun Hung Kai's deputy general manager for office leasing, said if the project were ready now, it would probably get rents higher than the 35 dollars per square foot that is the going rate per month in Kowloon.''We have spoken to a great number of people in the financial industry,'' Lo said, ''and the general comment from them is that they are still looking for more space in Hong Kong.''There is strong interest from Australia, the United States and Europe on investing in Hong Kong, Hollis said.''The world is literally awash with private equity money,'' he said.''There are literally billions of dollars that would like to get into the commercial market.''
2006 Copyright International Herald Tribune. http://www.iht.com
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