Chinese office buying spree in Hong Kong will slow in 2017, says CBRE
Beijing's capital control takes toll on mega transactions in territory
JENNIFER LO, Nikkei staff writer
HONG KONG -- Measures by China to curb capital flight will put at least a temporary brake on buoyant Chinese demand for offices in Hong Kong this year, said property consultancy CBRE.
Cash-rich Chinese companies, which have propelled office demand and pushed up rents in Hong Kong, will expand at a slower pace as Beijing's capital controls tighten their liquidity. In November, Chinese regulators began to vet payments abroad worth more than $5 million and imposed stricter scrutiny on large outbound deals in a bid to defend a depreciating yuan.
"We are still waiting for several deals to complete as mainland investors find it difficult to get their money out," Stanley Wong, CBRE's head of capital markets in Hong Kong, said on Monday without disclosing names. "There's at least a short-term impact on Hong Kong's capital market."
The Hong Kong government's sale of the Murray Road Carpark site in the first quarter will be a test for Chinese investors. Valued at about $2.2 billion, the 451,000 sq. feet (41,900 sq. meters) plot will be the first grade-A office site in the core business district of Central up for grabs in two decades. With capital restrictions in place, Wong expects "some impact" on mainland investors who are likely to team up with local developers in their bids.
The momentum of Hong Kong's commercial property market started to slow last year. By CBRE estimates, only 187 deals worth more than $10 million were completed in 2016 -- the lowest since the global financial crisis in 2009. The volume of $10 million transactions last year also fell 12% from a year ago, bringing total transactions to 85 billion Hong Kong dollars ($11 billion).
Mainland capital contributes to about 40% of investment volumes in Hong Kong offices, according to CBRE. Chinese investors typically have a stronger appetite for en-bloc buildings, rather than for separate strata-title office space, for better yields and setting up their regional headquarters in Hong Kong.
Nonetheless, the real impact of China's capital controls on the Hong Kong market would be hard to assess. "We've no idea how big their pool of capital is," said Marcos Chan, CBRE's head of research in Hong Kong, Southern China and Taiwan. "But one thing is sure -- their investment activity in Hong Kong is likely to slow as bringing money out is now more difficult than one or two years ago."
The overall impact, he said, would be more on "new capital" leaving China but less on companies with strong records of overseas investment and established financing channels abroad.
CBRE estimates that office rents in Hong Kong will remain broadly flat in 2017. Rents in Central are expected to edge up at most 5% due to continuous tight supply in core business districts. However, non-core districts like Kowloon will see rents drop by 5-10%, mainly due to a surge of new office supply of 2.8 million sq. feet -- the highest level since 2008 -- mostly in decentralized locations.