It's An Office Party In Hong Kong

Amid a strong recovery, commercial real estate rents and sales are rising fast

It's not much to look at. The cramped snack stand sells curried fish balls and squid skewers on a busy corner of Hong Kong's popular Mong Kok shopping district. But in June, ownership of the stand's 11.6 square meters changed hands for an eye-popping $4 million. That's $347,550 per square meter, the highest price ever paid for retail space in Hong Kong. Why? The stand's current rent of $15,400 a month could go up 25% next year as mainland tourists flood the area, according to Midland Realty Group, which brokered the sale.

The squid stand may be a special case, but its price is a sign that the dam has broken: Purchase prices and rents for commercial real estate in Hong Kong are on the way up after falling for seven years. With Hong Kong's economy showing signs of a robust recovery, prices for so-called grade-A office space throughout Hong Kong -- top quality and, usually, top location -- are up more than 70% from their SARS-induced lows of May, 2003. Corporate tenants are upgrading -- moving from outlying locations into the downtown financial district, known as Central -- and are confident enough in Hong Kong's future growth to pay lofty prices.

Rents look likely to follow suit. Jones Lang LaSalle, the international real estate broker, predicts Hong Kong office rents will rise 10% to 15% by yearend. Colliers International Property Consultants Inc. forecasts a jump of 20% in grade-A rents through July, 2005. Store rents are also rising as sales soar in ritzy shopping districts. The property rebound reflects broader economic growth. After years of stagnation and deflation, Hong Kong's gross domestic product surged 6.8% in the first quarter and is expected to tally at least 6% for the year. One important factor: the flow of Chinese tourists into Hong Kong since the mainland loosened travel rules.

The real estate revival has been a long time coming. Property prices and rents in Hong Kong peaked shortly after the former British colony was returned to Beijing's rule in July, 1997. The Asian financial crisis ravaged the region from late 1997 through 2000. SARS -- Severe Acute Respiratory Syndrome -- followed last year, devastating tourism. All told, property prices dropped two-thirds from 1997 to 2003.


One symbol of the turnaround is a Central office tower called Two International Finance Center. Two IFC and its partner, One IFC, together form Hong Kong's tallest, most prestigious office complex. But Two IFC's 140,000 sq. meters of office space exerted enormous downward pressure on rents when agents started marketing it last year. Today the first tower is almost fully rented, and Two IFC is filling fast. Among the tenants are banking giant UBS (UBS ), which moved from Exchange Square, an older complex in Central, and Ernst & Young International, which is consolidating its offices around Hong Kong.

Now developers are dusting off plans that had been shelved for years. Swire Properties Ltd., a leading Hong Kong landlord and developer, has started clearing ground for a planned 144,000-sq.-meter office tower that had been on hold since 1997. Swire's 46,500-sq.-meter Three Pacific Place is expected to be finished later this year.

Is a new bubble swelling? Skeptics worry about the effect of rising interest rates and a cooling mainland economy. Analysts are confident, though, that high-end property prices will continue to rise at least through 2005. Others argue that any exuberance remains largely confined to the top of the sector, and won't develop into full-blown property mania. "At the secondhand and lower end, prices are not going up," says Kelvin Lau, regional economist at Standard Chartered Bank. Good growth, no crash: That's the hope. Nigel Smith, executive director for office services at real estate brokerage CB Richard Ellis, says: "Hong Kong is becoming more of a mature market with less volatility." Except, of course, when a location has a lock on the market for squid skewers.

By Simon Cartledge in Hong Kong

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