The first six months of 2016 saw seven en-bloc office transactions completed in Hong Kong for a total consideration of HK$19.5 billion (USD 2.51 billion), a boon for developers selling the properties and a massive increase on the three deals worth HK$1.9 billion (USD 240 million) reported in the same period last year.
Mainland companies’ continued activity in Hong Kong was behind the increase. Everbright’s HK$10 billion (USD 1.29 billion) purchase of the Dah Sing Financial Centre in February was the stand-out deal in the period, marking the second-largest en-bloc office acquisition on record.
Everbright’s purchase followed China Life’s HK$5.86 billion (USD 760 million) investment in One Harbourgate West and Evergrande’s purchase of Mass Mutual Tower for HK$12.5 billion (USD 1.61 billion) in November 2015 (3), which broke the record for the largest en-bloc office deal.
Hong Kong: firm investment fundamentals
Mainland firms’ increasing activity in Hong Kong shows that, while they are widening their investment scope across the world, they remain particularly attracted to Hong Kong because of its core market fundamentals.
“Hong Kong is the most competitive city in the world and has many advantages over other cities in the region because it is a top financial center, with an efficient legal system that protects private property rights and the free flow of capital and information.” Kent Fong, Regional Director, Hong Kong Capital Markets, JLL
These fundamentals augment Hong Kong’s prestige, which mainland firms want to attach to their brands. A prime example of this is Evergrande’s purchase of Mass Mutual Tower, which not only gave it the property, but also a huge advertising space overlooking Victoria Harbour.
Low vacancy and rent growth forecasts support investment demand
Current market conditions further strengthen the investment case as JLL’s most recent Hong Kong market update shows stubbornly low office vacancy rates – currently measuring 3.4 percent in Hong Kong as a whole, and 1.4 percent in Central. The crowded market indicates high tenant demand and the potential for strong income flows for asset owners.
With JLL’s Global Premium Office Rent Tracker showing that Hong Kong office rents are already the most expensive in the world, and with further rises forecast through 2016, market conditions indicate that it’s better to own – and protect yourself from high future cost increases – than to rent.
Hong Kong as regional financial hub
However, it’s Hong Kong’s longer-term potential as an entry point for international investment into China and exit point for capital out of the mainland, supported by a range of professional services that makes it even more attractive for Chinese firms, according to JLL’s April report on how mainland firms drive the Hong Kong property market .
That report showed that the number of mainland firms with Hong Kong offices totalled 1,091 at the end of 2015, a 52 percent increase compared with 2005, demonstrating mainland companies’ steady emergence in the Hong Kong property market.
Hong Kong’s role as a testing ground for liberalisation policies is also a major source of appeal to mainland companies. The development of the offshore renminbi market, the expansion of the Closer Economic Partnership (CEPA) between Hong Kong and the mainland, and the implementation of the Hong Kong-Shanghai Stock Connect program have all strengthened the case for mainland companies to set up in the city.
The Chinese government’s ‘One Belt, One Road’ strategy will also support demand by mainland firms for property in Hong Kong. Mainland corporates want to closely align themselves with the policy and use Hong Kong as a centre for financing, fund raising, asset management, and insurance as they look to expand overseas.
So, with a strong fundamental case, together with compelling market conditions and the coming impact of the Chinese government’s outwardly focused policies, it will be no surprise to see firms from China becoming more active in Hong Kong with the distinct possibility of more major deals emerging in the near future.
Regional Director, Hong Kong Capital Markets, JLL