Office Towers in Hong Kong Battered from All Directions: Big Haircuts for Investors amid Falling Rents and Rising Vacancies

As so often, this started well before Covid, but Covid is speeding up the process.

A case in point is the 73-storey Center office block. In late 2017, when Hong Kong’s multi-decade real estate boom was close to its vertiginous zenith, a consortium of business magnates called C.H.M.T Peaceful Development Asia Property bought 75% of the building from the city’s then-richest man Li Ka-shing for HK$40.2 billion (US$5.15 billion). According to real estate agents cited by South China Morning Post, it was the world’s most expensive transaction for a single building.

Each consortium member paid an average of HK$33,000 ($4,260) per square foot for their piece of the deal. The business plan was simple: rather than renting the office space, each member would divide the floors they owned into subdivided office units which they could then sell on to the occupants at a higher price, turning a tidy profit in the process. The plan rested on two basic assumptions:

  1. Many end-users would prefer to own their office in Central rather than pay the lofty rents;
  2. Prices for commercial real estate in Hong Kong would continue to soar, at least until the units had all been sold off.

For a while it seemed to work. In March 2019, one of the consortium members, Raymond Tsoi Chi-chung, sold the last subdivided unit on the 22nd floor for HK$35,000 ($4,520) per square foot — a 6% mark-up on the 2017 price. Two months later, another consortium member, David Chan Ping-chi, sold the 39th floor for the equivalent of HK$42,000 per square foot — 27% more than the average value paid by the consortium in 2017.

But then something strange happened: prices stopped rising, and then began falling, as the city’s real estate market was hit by the mother of all storms. First, Beijing imposed capital controls on money flowing out of China, much of which had been pouring into Hong Kong real estate. Trade tensions between the U.S and China then began escalating, leaving Hong Kong slap bang in the middle of the world’s two superpowers. Then the city was rocked by student protests, which recently met the immovable force of the Chinese Communist Party. And now, there’s the virus crisis.

In the second quarter this year, the volume of office real estate traded in Hong Kong collapsed by 95%, according to a report by Real Capital Analytics (RCA). That was more than any other major Asia-Pacific market analyzed by RCA.

Values of Class A office buildings in the city fell last year by 7%, the first fall since 2008, according to the commercial real estate services firm JLL; and with Covid-19 thrown into the mixer this year, prices have continued to decline.

Continue reading the article on Wolf Street

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