Immigrate to Hong Kong, invest and settle in Hong Kong, and keep an eye on Hong Kong properties. In Hong Kong, while they are all "buildings", they face different fates. The Hong Kong residential market is not just cooling down; housing prices have already seen a certain degree of decline, yet the office market can still be described as "frenzied".
According to research data from the international real estate consultancy Knight Frank on 21 cities worldwide, Hong Kong holds the top spot in the global office leasing market, with average annual rents exceeding 260 USD per square foot, while second-ranked New York is less than 160 USD. Market data further shows that in the year ending this January, rents for office buildings in Central, Hong Kong, jumped by 11.5%.
Behind this is the presence of an increasing number of mainland buyers. According to overseas media reports, mainland financial enterprises are deploying in Hong Kong's prime commercial districts at the fastest pace in 5 years. Large-scale office building transactions in recent months have been almost entirely handled by Chinese-funded institutions, especially financial institutions, rather than being taken over by local Hong Kong enterprises as in the past. In a public statement submitted to the Hong Kong Stock Exchange this February, Everbright Holdings stated that it would join forces with its parent company to acquire the top-tier office building, Dah Sing Financial Centre, located in Wan Chai, Hong Kong, for 10 billion HKD. Prior to this, China Life Insurance purchased the entire West Tower and retail space of One HarbourGate in Hung Hom for 5.85 billion HKD, and Evergrande also purchased the MassMutual Tower in Wan Chai for over 10 billion HKD.
BNP Paribas published a research report stating that the vacancy rate for office buildings in Hong Kong remains low, which will help stimulate an increase in office rents. JLL expects that rents for high-end office buildings in Central, Hong Kong, may rise by 5% to 10% this year. Barclays previously estimated that office rents in Hong Kong are expected to rise by 7% in 2016. Colliers International also expects that Hong Kong office prices will continue to rise this year. Some market participants have stated that since the launch of the Shanghai-Hong Kong Stock Connect, many Chinese-funded institutions have set up offices in Hong Kong, driving up the office rental and sales market. This move is also seen as a way to enhance international image and brand awareness, and to diversify overseas assets. Data shows that in 2015, Chinese-funded institutions accounted for approximately 40% to 50% of the new lease market in Central, serving as the main driving force for demand in the Grade A office market.
The development direction of the Hong Kong office market is slightly divergent from the overall real estate market trend. The upward momentum of the Hong Kong property market since 2008 came to a halt last August. According to the Hong Kong property price trend chart provided by Midland Realty, the Hong Kong property market began to show a downward trend starting last August. By last December, the average price per square foot of gross floor area had fallen from 8,740 HKD in August of last year to 8,190 HKD, and by March of this year, it had fallen to 7,683 HKD.
A report by the European investment bank CLSA showed that Hong Kong housing prices fell by 7.5% in the last quarter of 2015. The atmosphere in the Hong Kong property market has turned sluggish since the third quarter of last year, with both housing prices and transaction volumes falling, and secondary housing transaction volumes lingering at low levels for several months. Sammy Po, Director of the Residential Department at Midland Realty, stated that future increases in supply, the high probability of Hong Kong following the Federal Reserve's interest rate hikes, and a weakening economic environment, combined with the fact that the Hong Kong government's property market "spicy measures" (cooling measures) will not be easily lifted, are all factors that will affect the performance of the Hong Kong property market this year. It is expected that the Hong Kong secondary housing market will see a decline of 10% this year.
What is the relationship between housing prices and commercial real estate such as office buildings? The situation in Shanghai is quite different from that in Hong Kong, as demand in both the office leasing market and the residential market is very strong. The unusually active Shanghai real estate market has attracted market attention, and the local government introduced the "strictest ever" new property market policy in March to cool down the real estate market. In the first quarter of this year, Shanghai office rents continued to rise by 2.3% quarter-on-quarter. Knight Frank's research data on 21 cities worldwide shows that Shanghai ranks tenth in the global office leasing market, with an average annual rent of about 70 USD per square foot.
The Hong Kong office market is ranked as the world's highest, but some analysts say that the rise in housing prices and rents actually has the same effect as a tax increase. The reason Hong Kong is the region with the lowest tax rate in the world is that it cannot raise taxes. High housing prices are already equivalent to collecting high taxes; if taxes were raised further, companies might choose to "flee".