Limited stock and low interest rates drive HK property investment

The investment real estate market in Hong Kong continued to be driven by limited stock, ample liquidity, low interest rates as well as strong rental increase in the first half of 2011, according to a new report published today (Thursday July 14).

Despite the higher prices and lower yields, sustained investment demand was seen across all key property sectors, the Hong Kong Mid Year Property Review from property consultants and advisors Jones Lang LaSalle shows.

The austerity measures, as laid down by the government, did not prevent the residential sector from remaining as the focus in the investment market, followed by the office sector. A total of 162 transactions were recorded for properties at over HK$100 million, excluding land auctions, in 2011. Total considerations reached over HK$42 billion.

The first half of the year also saw limited en bloc sales transactions in the office market, with the sale of Honest Motors Building in Causeway Bay for HK$580 million being the most notable one.

‘The government’s further control on residential sales has brought about an interesting trend for the investment market, with some investors shifting their attention onto the commercial sectors, including but not limited to industrial and lower-end office properties. As rents continue to climb in these commercial property sectors, we expect to see investment demand remaining strong for the remainder of the year,’ said Joseph Tsang, managing director of Jones Lang LaSalle Hong Kong.

After experiencing a record year of net take up in 2010, Hong Kong’s Grade A office market continued to register strong demand and rental growth through the first half of 2011. The period saw a sustained level of expansion requirements, while moving eastbound remained as a key trend on the back of higher rentals in the core CBD locations. From January to June 2011, overall net take up amounted to 1.46 million square feet.

In general, vacancy levels remained low across all sub markets despite the completion of a few new Grade A quality buildings. The completion of 1.6 million square feet of new supply in the first half of the year has pulled the overall vacancy rate up by 0.1% to 4.8%, still below the so called frictional level.
 
As rents in Central continued to climb to reach their historic peak levels, demand for space in other core locations on Hong Kong Island remained strong, driving vacancy in Wanchai/Causeway Bay down to just 2.3% and that in Hong Kong East to 3.2%. Strong absorption in Tsimshatsui also drove vacancy down to 3.1%.

The tight vacancy environment has put landlords in a good position to bargain for higher rents. Overall rents went up 15.0% in 1H11, with the highest growth seen in Hong Kong East (18.1%), Central (16.4%) and Wanchai/Causeway Bay (13.4%).

The sales market continued to see sustained demand for office properties with several buildings reporting new record high unit prices during the period. Capital value growth accelerated across all sub-markets, with the strongest growth seen in Wanchai/Causeway Bay at 24.1%, followed by Central at 23.3% and Kowloon East at 15.8%.

In terms of supply, except for a project in Kowloon East, all commercial Grade A office buildings scheduled for completion in 2011 were completed in the first half of the year. Although the supply pipeline has widened in the past six months, with the government making available several development sites in Wanchai and Kowloon East for auction/tender, supply over the immediate term remains limited especially on Hong Kong Island.

‘In spite of the strong net take up posted in the first half of 2011, growing uncertainties in the global economy may slow business growth momentum in the short term as some tenants hold a wait and see approach before committing to further expansion plans,’ said Gavin Morgan, deputy managing director and head of leasing of Jones Lang LaSalle Hong Kong.

‘The return of spaces upon lease expiry in some individual buildings will prevent vacancy rates from falling fast, as was the case in the past 12 months, although the majority of portfolio landlords in town are still enjoying very healthy occupancy levels. In general, we expect Grade A office rents across all submarkets to climb further in the second half of 2011, but possibly by a slightly slower momentum,’ he added.