Hong Kong commercial real estate investment market still riddled with challenges

The market maintained its lacklustre performance in Q3.

The high cost of funding remains a significant concern for the local property investment market, with 3-month HIBOR standing at 5.2% at the end of Q3/2023, according to a Savills report. 

“The ongoing softening of the Mainland China economy and the worsening debt situations of many Mainland developers and related financial institutions have further dampened investment sentiment. Mainland capital, previously a key source of funding for major transactions, has become even scarcer in the market,” the report added.

Here’s more from Savills:

Despite this, state-owned enterprises (SOEs) continued to demonstrate their presence in the hospitality sector. China Tourism Group, for instance, made headlines by acquiring De Fenwick, a serviced apartment in Wanchai, for a substantial HK$900 million. The company plans to carry out a joint redevelopment project with their existing property, the Kew Green Hotel Wanchai, which is also under their ownership and operation. Notably, this purchase marks their second hotel asset acquisition of the year, following their previous investment of HK$3.4 billion in the Kimberley Hotel located in Tsim Sha Tsui.

The commercial investment market remained subdued, with the only en-bloc transaction involving a distressed sale of a Grade B office at 28 Austin Avenue in Jordan, which sold for HK$138 million with vacant possession. End users continued to show interest in the strata office market, with 28/F of Shun Tak Centre, China Merchants Tower, selling for HK$778 million (HK$30,635 per square foot) to China Merchants. 

More receivers' en-bloc assets, primarily those previously held by troubled Mainland developers, are expected to be put on the market for sales, but the success of these sales may depend on how much lending banks are willing to compromise given the current weak market sentiment and relatively high LTVs of these assets.

During the first eight months of 2023, retail sales experienced a significant 19% YoY growth. Nevertheless, the appeal of newer and larger shopping malls in Shenzhen, which offer a wider range of shopping and dining options at discounted prices, attracted a considerable number of young Hongkongers to cross the border during weekends. This trend is evident in the average of over 6 million outbound trips per month by Hongkongers from April to September. 

As a result, only retail deals with high yields have been recorded in the past three months. Retail podiums with a value exceeding HK$500 million were transacted with yields of 5% or more, while smaller-cap retail podiums ranging from HK$100 million to HK$250 million were sold with yields around 3.5% to 4%. The latter category, in particular, was predominantly acquired by local investors residing within the respective districts. 

Looking ahead, the investment market is expected to continue being influenced by high interest rates and cautious lending policies by banks toward property loans. Demand for office and retail spaces is likely to come from both end users and local investors who have specific usage requirements or a special interest in their acquisition targets. 

Additionally, there is an increasing interest in hotels, driven not only by their potential for conversion into other short-term accommodation products but also by the genuine recovery of the sector. It is anticipated that Revenue per Available Room (RevPAR) will rebound by approximately 60% in 2023, falling only 10% below the pre-COVID levels of 2018. However, the escalating price per key for hotels on the market may result in limited transaction volume for the sector in the near future.