Seeking to hedge against rising rents and a shortage of space, banks and insurers are on a record spree of buying office buildings in Hong Kong, where occupancy costs are the second-highest in the world.
Manulife Financial Corp., Canada’s biggest insurer, and Hang Seng Bank Ltd. this year bought office towers in the city, joining financial firms such as AIA Group Ltd. and Agricultural Bank of China Ltd. in spending more than HK$18.8 billion ($2.4 billion) on commercial properties from January 2012 to last month, according to Cushman & Wakefield Inc. That’s the most for a 16-month period on record, the broker’s data show.
Companies are looking to secure space in the city where new office supply will fall a third short of demand by the end of the decade, according to Rhodri James, executive director for office services at CBRE Group Inc. The office vacancy rate in Hong Kong fell to 3.3 percent in the first quarter, the lowest in Asia behind Beijing, according to the broker.
“This spate of purchases by financial institutions is unprecedented,” said Sigrid Zialcita, Singapore-based managing director for Asia-Pacific research at Cushman & Wakefield. “It allows them to manage their costs, especially given the high rents and the propensity for continual rent increases in this supply-constrained environment.”
Demand for offices in Hong Kong has been swelling as the former British colony that was returned to Chinese rule in 1997 cemented its place as a regional hub for global banks and brokerages seeking corporate deals as China became the world’s second-biggest economy. Hong Kong was the world’s biggest market for initial public offerings in 2010, when companies raised $58 billion through initial share sales.
Manulife said April 10 it will buy a 512,000-square-foot (47,566-square-meter) tower in the Kowloon East district from developer Wheelock & Co. for HK$4.5 billion, the second-highest price paid for an office building in the city. Upon completion in 2015, it will be used as headquarters for the insurer’s 1,200 staff and 5,500 agents.
The largest deal on record is Agricultural Bank of China’s purchase last year of 50 Connaught Road in the Central district for HK$4.9 billion. Apollo Global Real Estate and a unit of Hong Kong-based National Electronics Holdings Ltd. were the sellers.
Hang Seng Bank, a unit of London-based HSBC Holdings Plc and the No. 2 Hong Kong-based bank, paid HK$2.9 billion in February for a 30-floor office building in the Mong Kok area, while AIA, the city’s second-biggest insurer, in October bought the 300,000-square-foot Stanhope House in the Island East district for HK$2.4 billion. As of January, financial services companies accounted for 49 percent of prime office tenants in the Central district, according to data compiled by CBRE.
More buildings are coming to the market that may be snapped up by financial firms, said Daniel Chow, general manager for sales and distribution for consumer banking at Standard Chartered Plc.
Jones Lang LaSalle Inc. has been appointed by Wing Hang Bank Ltd. to sell a 27-story office building in Wan Chai, the broker said in an April 22 statement. Wan Chai, a district to the east of Central, is known for its nightlife and landmark Central Plaza, once Hong Kong’s tallest building.
Last year, Jones Lang was hired by Sino Land Co. to seek buyers for the 330,000-square-foot Centrium office and retail complex in Central that the developer valued at HK$7 billion.
“We’re going to see more financial companies considering to buy commercial buildings as their offices or branches,” said Chow. “This will be the trend unless there’s a sharp decline in rents.”
Rents probably won’t fall significantly because Hong Kong has one of the world’s lowest office vacancy rates. Developers will probably add about 11 million square feet by 2020, compared with projected new demand of 17 million square feet over that period, according to CBRE.
Office rents in Central rose to the world’s highest in 2008 as mainland Chinese companies turned to Hong Kong banks over the preceding decade, before dropping one place at the end of 2012, according Cushman & Wakefield. London’s West End topped the survey with an average annual cost of $262 a square foot last year, followed by Hong Kong at $184 and Rio de Janeiro’s $165.
Central is home to the regional headquarters of Goldman Sachs Group Inc. and HSBC, Europe’s biggest bank by market value.
With supply tightening in Central, financial firms have gone to the east of Hong Kong Island and across the harbor in search of alternatives, particularly for back-office operations. The trend accelerated after the collapse of Lehman Brothers Holdings Inc. in 2008, with global banks seeking cheaper rents to cut costs.
Kowloon East, an area of industrial complexes and lower-middle-class housing that spans three subway stations, has emerged as the fastest-growing office location for financial companies. The government has pledged to develop it into a secondary financial district, with the abandoned Kai Tak airport site potentially seeing more than 40 million square feet of prime office space.
“The area is changing fast and the infrastructure is decent,” said Thomas Lam, head of Greater China research and consultancy at broker Knight Frank LLP, which predicted office rents in Kowloon East will lead gains in the city over the next three years.
Sun Hung Kai Properties Ltd. and Henderson Land Development Co. are among developers that have completed commercial projects in the area in the past decade, while companies such as PricewaterhouseCoopers LLP and Standard Chartered have moved parts of their operations from Central.
Manulife isn’t the first financial services company to acquire its own building in Kowloon East. China Construction Bank Corp., the nation’s second-biggest lender, in March of last year paid Sino Land HK$2.5 billion, or about HK$7,200 a square foot, for an office tower in the area.
Monthly rents in Kowloon East rose 4.5 percent in the first three months of 2013 from the previous quarter to HK$31.71 a square foot and those in Central gained 0.3 percent to HK$98.77 a square foot, according to Cushman & Wakefield.
Districts beyond Central are also picking up. Island East, where JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc have back offices, saw rents gain 5.3 percent to HK$44.77 in the three months to March 31, according to Cushman & Wakefield. West Kowloon, where the International Commerce Centre, the city’s tallest skyscraper, houses the headquarters of Credit Suisse AG and Morgan Stanley, rose 6 percent to HK$41.02.
“In those off-Central locations, there could be a large rent growth down the years,” said Joseph Tsang, managing director in Hong Kong for Jones Lang. “The buyers are looking at a 10-year horizon and thinking, if we have to have our rents increased every three years, we may as well buy our own building. There are also the potential gains in book value.”
Much of the buying spree took place before the government this year imposed its first measures aimed at curbing speculation in commercial properties.
The stamp duty on all properties above HK$2 million was doubled Feb. 23 and buyers now have to pay the tax when they sign the purchase agreement.
“For end-users, they can use the tax as a bargaining tool to ask sellers to cut prices,” said Peter Yuen, Hong Kong-based deputy managing director and head of investment and sales at Savills Plc. “If you even out the extra taxes over 10 years, that probably doesn’t mean much to them.”
Still, some companies’ plans could be delayed by the higher taxes. The number of office deals above HK$100 million fell 41 percent in the first quarter from the previous three months, according to data compiled by Centaline Property Agency Ltd. Transactions over HK$20 million, the threshold most property agents use to define investment properties, have fallen an estimated 60 percent since the government measures in February, said Savills’s Yuen.
“Even some end-users will find the measures very harsh,” said Tsang. “This is killing a lot of potential buyers’ interest. Not everyone has the financial strength of Manulife.”
Curbs on residential properties, in place since 2010 to stem a surge in homes prices that have more than doubled since early 2009 to world’s highest, may be encouraging developers to sell commercial real estate more aggressively as they try to make up for falling apartment sales, said Antonio Wu, Hong Kong-based deputy managing director at Colliers International.
Residential sales are now near the lowest level in 10 years. Deutsche Bank AG expects home prices to decline as much as 20 percent over the next two years.
Henderson Land has sold 103,600 square foot, or about half of the total commercial space being built, in a 25-story new office tower in the southern Aberdeen area, Thomas Lam, general manager for sales at the developer, said in a May 2 briefing. The builder plans to sell more space later this month, he said.
Sun Hung Kai will begin selling an office building in Kowloon East this year, deputy managing director Victor Lui said in February.
“We’re definitely seeing interest for self-ownership with occupiers,” said CBRE’s James. “We do anticipate more deals, but opportunities will be limited due to the extremely tight supply situation.”