34% jump in prices seen this year amid signs of economic recovery
(HONG KONG) Hong Kong city centre office prices, down by almost half since Lehman Brothers Holdings Inc's collapse, may rise 34 per cent this year, as speculators bet on local economic recovery, CB Richard Ellis Group Inc (CBRE) said.
The average price of prime office units in the central business district may rise to as much as HK$13,000 (S$2,450) per square foot (psf) by year-end from HK$11,167 in May as rich individuals seek alternative investments to stocks and bank savings, Benedict Ma, an analyst at CBRE, said in an interview on Tuesday.
Low borrowing costs and bank-savings rates of almost zero are prompting investors to buy office space in Hong Kong, where rents are the world's fourth-highest. The benchmark three-month interbank loan rate fell to a four-year low as liquidity surged after Hong Kong issued record amounts of the local currency to preserve its fixed exchange rate.
'A lot of the activity in the strata office market is not fundamentally driven, it's much more speculative as rents are still falling,' Rhodri James, executive director of office services at CBRE, said on Tuesday. 'The key thing is do we see the economy turning around in six to 12 months? This justifies why they are buying today.'
The strata market refers to units or floors, instead of whole buildings: there are four such prime office buildings in Central and neighbouring Admiralty, according to CBRE. Average prices fell as much as 49 per cent from their peak of HK$16,900 after Lehman collapsed in September, Mr Ma said.
There were four sales of prime office strata units exceeding HK$100 million in value between January and May, compared with 21 in the first half of 2008, Mr James said.
Still, gains in office prices may leave investors 'exposed' if the economy and rents fail to recover in the next six to 12 months, Mr James said.
Job cuts by HSBC, Television Broadcasts Ltd and PCCW Ltd pushed Hong Kong's unemployment rate to a three-year high of 5.3 per cent in May. The economy contracted 7.8 per cent in the first quarter from a year earlier as exports slid the most since 1954.
Some investors may expect real estate to rebound first. The Hang Seng Property Index, tracking six of the city's largest developers, has gained 35 per cent this year, compared with the 24 per cent increase in the benchmark Hang Seng Index.
Billionaire Lee Shau- kee, Henderson Land Development Co chairman, sold a floor of office space at The Galleria on Queen's Road Central for HK$18,000 psf earlier this month, 59 per cent more than another floor in the same building sold for in May, Sing Tao reported on June 11.
Bonnie Ngan, a Henderson spokeswoman, declined to comment on the report.
The value of office space is rising even as falling rents cut yields to 3.9 per cent from 5 per cent at the end of 2008, CBRE said. By comparison, a HK$150,000 deposit with HSBC Holdings plc, the bank with the most branches in Hong Kong, generates annual interest of 0.001 per cent, or HK$1.50.
Hong Kong's lending benchmark three-month interbank offer rate, or Hibor, was at 0.334 per cent on Tuesday, down from 0.949 per cent at the beginning of the year.
'People will have positive cash flow in buying grade A offices because the Hibor is very low,' said Alvin Yip, head of investment for South China at UK-based real estate broker DTZ Holding plc said by phone yesterday.
Low rates and lack of investment alternatives mean overall office prices may rise as much as 15
per cent in the third quarter from the second even as rents are little changed, Peter Chan, director of commercial department at Centaline Property Agency Ltd, one of Hong Kong's biggest realtors, said earlier this week.
Prime office rents in Hong Kong fell 19 per cent in the first five months of 2009 to average HK$42.76 a square foot per month and may drop a further 11 per cent this year as companies shelve expansion and hiring plans to cope with the recession, CBRE forecasts.
The office vacancy rate in Central rose to 4.8 per cent in April, from a recent low of 0.9 per cent in February 2008, even without new supply, said Simon Lo, Hong Kong-based director of research and advisory at Colliers International.
CBRE forecasts the rate will rise to 7 per cent on Hong Kong Island this year.
'There're no fundamentals to support price increases,' Mr Lo said in an interview. 'If you are brave enough and have plenty of cash, you may hold it for two years and expect to make some decent gains while forgetting about rental yields.' - Bloomberg
Source: Business Times, 18 June 2009