Despite challenging macroeconomic conditions, end users have emerged as dominant players in the Q4/2023 investment market, according to Savills in its Market in Minutes – Hong Kong Investment report of February 2024.
Notable Transactions in 2023 Exceed Expectations
Total en-bloc / major commercial transactions in 2023 surpassed the previous year by 16%, with HK$31.1 billion worth of properties changing hands. Office assets accounted for the majority of these transactions (60%), despite continuous declines in both prices and rents. This trend reflects end users’ and, in some rare cases, investors’ appetite for bargain-hunting in the falling office sector. Two significant end-user deals included the Security and Future Commission (SFC), a quasi-government body, which purchased the nine floors they currently lease, along with three adjacent floors (totaling 296,000 square feet) in One Island East for HK$5.4 billion. Additionally, Li Ning, a Mainland sportswear retailer, acquired the en-bloc office of Harbour East in Island East (144,000 square feet) for HK$2.2 billion, with plans to utilize part of the building as their headquarters in Hong Kong.
Hotel, Retail and Industrial Properties Fall Short of Expectations
Despite high expectations surrounding the reopening of borders, hotel and retail properties represented only 34% (approximately HK$10 billion) of major transactions in 2023.
The industrial sector experienced a sluggish performance for most of 2023, with limited activity. However, towards the end of the year, two significant deals were registered. CR Logistics acquired Kerry’s warehouse in Fanling for HK$1 billion, while Blackstone partnered with StoreFriendly to purchase an en-bloc industrial building in Tsuen Wan for around HK$560 million. These developments indicate a potential recovery in the industrial sector. Nevertheless, total volume of industrial transactions still only reached HK$1.9 billion in 2023, a marked decrease of 88% from HK$15.1 billion last year.
US Fed Rate Cuts Bring Potential Relief
The US Federal Reserve recently signaled its intention to implement multiple rate cuts in 2024. While these rate cuts are expected to provide some relief in terms of the cost of funds for commercial real estate loans, they may only be realized towards the second half of the year. This means that the local commercial real estate market will likely continue to face a high-interest rate environment for the first half of the year.
Market Dynamics Shift Towards End Users and Niche Investments Amidst Challenging Conditions
With office and retail rents both experiencing a downward drift, the investment landscape for commercial assets is facing significant challenges. As a result, we anticipate that the investment market will once again be dominated by cash-rich end users seeking suitable premises within this difficult market environment.
However, amidst these circumstances, certain segments continue to hold potential for investment. High-yielding properties with stable incomes, particularly suburban retail premises offering yields of 6% or higher, remain attractive to investors seeking reliable returns. Additionally, niche products with a demand profile that deviates from traditional commercial properties, such as student housing and co-living premises, may still garner substantial interest from genuine long-term investors.
Savills Price Forecast for 2024
Savills predicts a 10% decrease in Grade A office prices and a 5% decrease in prime street shop prices for 2024. These forecasts reflect the ongoing challenges in the market for the coming year.
Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “With interest rates likely to remain high before mid-2024, genuine interests from investors would be limited unless attractive yield levels or special / niche assets with different demand profile can be identified.”
Mr. Peter Yuen, Managing Director, Investment & Sales of Savills said, “Banks’ attitudes towards further lending into the commercial real estate market will be a crucial factor in determining the willingness and abilities of returning property investors. Over the past two years, some local banks have faced distress in their CRE lending portfolios, while others have experienced higher-than-expected loan-to-value ratios. Their lending practices will significantly impact the investment landscape.”