SAR's office rents seen to remain world's highest over next 5 years amid growing cross-boundary financial links

The onset of financial liberalization on the Chinese mainland has brought burgeoning demand for Hong Kong office space, which promises to fuel investments in this lucrative sector.

The Shenzhen-Hong Kong Stock Connect, announced in mid-August by the China Securities Regulatory Commission and Hong Kong's Securities and Futures Commission, is the second direct equity market trading link between the SAR and the Chinese mainland after the Shanghai trading link debuted in November 2014.

Financial analysts expect the Shenzhen link to be more positively received as it provides buying opportunities in high-growth technology, media and entertainment stocks.

The absence of an aggregate trading quota for the Shenzhen link also indicates the mainland's capital market liberalization is maturing, and policymakers are becoming more comfortable with cross-boundary foreign exchange flows and the outlook of the renminbi.

"With the Shenzhen-Hong Kong Stock Connect likely to come into operation in December, increasing office demand from mainland financial institutions will provide further rental support in Central, given the tight availability," said David Ji, director and Greater China's head of research and consultancy at UK-based real estate advisory firm Knight Frank.

According to Knight Frank's Global Cities 2017 Report, Hong Kong is the world's most expensive city to rent prime office space, at $278.5 per square foot per annum. This is 76 percent higher than runner-up New York, with its Manhattan business district. The report predicts Hong Kong's office rents will continue to be the world's highest in the next three to five years.

"We expect rents in the Central and Hong Kong East business districts to grow further into early 2017. The pressure on vacancy and rents in the top end of the Central business area will continue to support relocation to nearby lower cost districts, although this is unlikely to significantly impact vacancy in the short term," predicted Alex Barnes, head of Hong Kong market at Jones Lang LaSalle (JLL), a global property investment adviser.

"The stabilization of the mainland economy and the scheduled launch of the Shenzhen-Hong Kong Stock Connect will help lift mainland demand, which had been flagging in recent months, although it is unlikely to return to levels seen following the initial announcement of the launch," JLL's head of research Denis Ma said.

With stable returns offered by office properties, it's likely that more investors will be lining up for a piece of the lucrative pie.

This has been evident with local developer Wheelock and Co selling both towers of its One HarbourGate complex in Hung Hom to mainland investors, with insurance giant China Life Insurance (Overseas) acquiring the West Tower for HK$5.8 billion late last year. Shenzhen-based Cheung Kei Group, controlled by billionaire Chen Hongtian, snapped up the East Tower for HK$4.5 billion in July this year.

Meanwhile, tycoon Li Ka-shing's Cheung Kong Property Holdings - the property flagship of CK Hutchison Holdings - is reportedly considering offloading its 75-percent stake in the 73-story commercial skyscraper The Center, located in the Central business district. It has a property valuation appraisal of between HK$26.6 billion and HK$50 billion.

Besides the implementation of direct equity market trading links, the growing flexibility of the yuan exchange rate has also propelled more investments in the SAR's office sector.

The Chinese mainland devalued the renminbi by 1.9 percent against the US dollar in August last year in a bid to allow greater flexibility in the renminbi exchange rate. Since then, mainland investors have accelerated their acquisitions of property assets in Hong Kong and overseas as the value of the renminbi declines further against major currencies.

"In 2015, mainland companies invested more than 28 billion yuan ($4.2 billion) in Hong Kong properties," said Oscar Chan, regional director at JLL's mainland capital markets team. "This hunger for Hong Kong real estate shows not only the growing international footprint of many mainland companies, but also stronger recognition of the value of holding properties valued in different currencies."

"Buying overseas currency-denominated assets helps the mainland's biggest investors to diversify their portfolios," added Darren Xia, JLL's head of international capital group for China.

With the financial market anticipating that the People's Bank of China may allow the renminbi to depreciate up to 3 percent this year, there is rising interest among mainland insurance companies and financial institutions to acquire overseas property assets as they seek to enhance investment returns rather than just holding cash.

Amid stronger investment demand for local commercial properties, Hong Kong developers are scrambling for land to build office properties in order to reap lucrative profits.

"We do not believe the office sector is at its cyclical peak, and this will correct soon," predicted Jonas Kan, head of Hong Kong/mainland property research at investment bank Daiwa Capital Markets.

"The market is likely to accept that mainland demand for offices is likely to stay. Solid office sector fundamentals should help office landlords catch up in the fourth quarter this year," he said.

Two local developers have reached agreements with the government on lease modification premiums to convert sites for commercial use. Sun Hung Kai Properties and Kowloon Motor Bus Co agreed to pay a HK$4.31-billion land premium for 98 How Ming Street in Kwun Tong, while Henderson Land Development Co settled on HK$2.22 billion for 18 King Wah Road in North Point, according to JLL data.

A local property fund reportedly acquired en-bloc office properties at EIB Centre in Sheung Wan for HK$1 billion, JLL said.

The agency also said Hong Kong developer First Group Holdings forked out HK$789 million for a commercial development site in Kwai Chung in July - 12 percent over the higher end of market expectations and surpassing the record price set by Sun Hung Kai Properties for a nearby business development site in May.

Market sources said First Group will spend HK$1.3 billion to build a new office building, which is expected to be completed in 2019.

oswald@chinadailyhk.com

A view of the International Commerce Centre in West Kowloon. Stable returns in Hong Kong's office property market have lured many Chinese mainland investors to the city. With the Shenzhen-Hong Kong Stock Connect due to kick off in December, growing office demand from mainland financial institutions will provide further rental support in the Central business district, given the tight availability, experts say. Anthony Kwan / Bloomberg

(HK Edition 09/28/2016 page9)