Real Estate

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

You know a property market is overripe when new supply keeps setting price benchmarks, but existing buildings find few or no takers.

That's undoubtedly the case in Hong Kong housing, where a three-month-long slump in secondary-market transactions is flashing a warning sign for owners of shoebox-sized apartments in the world's least affordable city.

But on the flip side, offices are booming, thanks to Chinese demand. The reason the city's commercial property market, also the world's priciest, poses no such anxiety for investors lies in blockbuster transactions that refuse to dry up.

Lofty Heights
Hong Kong is home to the world's most expensive office property, beating Beijing and New York
Source: CBRE Research
Note: Ranking by prime office rents per annum as of second quarter 2017. Tokyo data are for Marunouchi/Otemachi area.

Less than a week after Goldman Sachs Group Inc. wrote a cheery report about the territory's office market comes a HK$40.2 billion ($5.15 billion) deal for The Center, reported by the Hong Kong Economic Journal on Monday.

If the unidentified Chinese buyers do pay that much for the 75 percent stake held by Hong Kong tycoon Li Ka-shing's CK Asset Holdings Ltd., it will be the most expensive single-tower transaction and the latest in a string of mainland firms acquiring property in the city. Until the sale, the most expensive office property to change hands was the HK$23.3 billion purchase of a car park site in May this year by Hong Kong's Henderson Land Development Co.. Before that, the record belonged to one of the most indebted mainland developers, China Evergrande Group.

The transaction would also be an early endorsement of what Goldman calls three megatrends: Demand for space from the Chinese financial, insurance and real-estate industries as the country continues to liberalize; an overall push for mainland companies to go global, even as some high-profile firms are reined in due to excessive leverage; and the development of the so-called Greater Bay Area.

Premier Li ­Keqiang used that term in March to describe an urban cluster connecting Hong Kong and Macau with China's Guangdong province. The 11-city agglomeration produced $1.3 trillion in goods and services last year and is home to nine times as many people as the San Francisco Bay Area, according to the South China Morning Post. 

Will integration make Hong Kong the Jewel of the Bay, as Goldman terms it? Or will it end up robbing the former British colony of the special characteristics -- such as freedom of speech and an independent judiciary -- that allow it to function effectively as a global financial center?

Neighbors Are Coming
Mainland Chinese firms account for 50 percent of new leasing demand in Central, from 18 percent in 2011
Source: JLL, Goldman Sachs
Note: Data show market share of Chinese firms in terms of new lettings in Hong Kong's Central district, by floor space leased.

Those may be important questions for Hong Kong's future, but as the deal for The Center shows, Chinese office buyers in Hong Kong aren't standing by for answers. Indeed, they aren't even waiting for the controversial Hong Kong-Zhuhai-Macau bridge, which is expected to open to traffic next year. Half of new leasing demand in the city's central business district now comes from mainland firms, compared with only 18 percent in 2011.

Then there's supply. Hong Kong's residential property market may be dominated by a constant dribble of project launches. But, unlike in Singapore, there aren't many new office towers springing up.

With 1.7 percent vacancy rates in Hong Kong's Central district (compared with more than 12 percent for private offices in Singapore), and plenty of generous tenants from across the border willing to fork out heady rental payments, this office market isn't going to slow anytime soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net