Overseas investors are snapping up property in Hong Kong's financial centre, pushing up sale and rental prices

Real estate investors around the world are snapping up commercial buildings and office blocks in Hong Kong, lured by rising prices and rental yields and the city’s transparent property market.

In the latest in a string of such deals, Morgan Stanley Real Estate Fund paid HK$1 billion (US$128.5 million) for a majority stake in Shama, a Hong Kong serviced apartment and property company. The Schroder Asian Properties Fund was the vendor of Shama which operates five properties in Hong Kong, including 233 apartments and six restaurants.

Such deals are riding on the back of strong demand for commercial property in Hong Kong as a wide variety of foreign companies seek a foothold in the financial centre or look to expand their presence.

“Basically it is a demand-driven scenario,” says Tony Chan, Executive Director at Vigers Appraisal and Consulting. “Also, there is little new supply in the prime central locations. The outcome of that is reflected in these deals.”

Worldwide demand

The demand for office space and service apartments is coming from financial institutions, law firms, accountants and ancillary services.

“They are coming from all over the world,” said Mr Chan. “Hong Kong is a spring board into China. Hong Kong is equipped with the best legal and banking system. It’s good to set up a regional headquarters in Hong Kong before you jump into China.”

The influx amid tight supply is pushing up rents. Hong Kong’s most prestigious office tower, the 88-storey IFC2, recently struck a tenancy deal at HK$105 (US$13.5) per square foot per month, setting a new benchmark high for the city. The AIG Tower nearby in the city’s Central district has achieved HK$85 (US$11) per square foot per month.

Grade A office rents rose 55 per cent last year and are tipped by analysts to rise by up to 25 per cent this year. For top 10 buildings in prime locations, vacancy rates are the lowest in 12 years, according to CB Richard Ellis research.

Buildings which are now being rented out at HK$20 to HK$22 (around $US2.6) per square foot are yielding a 4 per cent annual return on purchases prices. But if rents rise to HK$30 to HK$35 (around US$4.3) in the next year or so, annual yields are tipped to be an even more attractive 7 per cent.

Mainland investors surge

Besides demand from overseas, a growing number of mainland companies are taking up space in Hong Kong - some after listing on the city’s stock market, others tourism-related new arrivals since the introduction of the individual travel scheme in 2003, says Buggle Lau, chief analyst of Midland Realty.

Morgan Stanley started the trend for foreign investors to buy whole buildings in Hong Kong when it paid HK$843 million (US$108 million) n 2003 for Vicwood Plaza, a 38-storey office and shops complex in Sheung Wan, next to Central. It later sold the building to Macquarie Global Property Advisors for HK$2.6 billion (US$333million), reaping a tidy profit.

More in the pipeline

“I do see more deals coming,” said Vigers’ Mr Chan. “Big firms such as Carlyle Group and Macquarie are coming with billions of dollars. It’s phenomenal,” he marvels.

Pricing for Hong Kong commercial property is likely to stay firm because of the limited number of buildings which come on to the market, said Midland’s Mr Lau. “The majority of the stock is being held by major listed property companies like Hongkong Land or Hysan Development,” he said.

Part of the attraction of Hong Kong goes beyond the fact that the property cycle is in a sweet spot. Hong Kong’s regulatory and property services backdrop also provides a lot of comfort for potential bidders in regard to due diligence checking, and the costs are reasonable.

In contrast, acquiring commercial buildings in the mainland is not so straight forward and can be more expensive – often because of the need to fly in a team of lawyers from Hong Kong to do an independent due diligence check.

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