Concrete Analysis | Golden period ahead for real estate sector in Hong Kong

Last month , my colleague John Davies penned an article in the Post in which he remarked, “To establish the value of the purchase by measuring prices paid previously in the area is not comparing like with like. One must consider how an area is likely to evolve into a destination and how this translates into the alpha element of project returns, over and above the beta return delivered by the Hong Kong market as a whole.” This phrase came to mind when considering the recent residential land purchase in Kai Tak by HNA Group.

It is my view that Kai Tak, and Kowloon East on the whole, will continue its transformation from an industrial location to a vibrant multi-use destination. However, regarding the aforementioned land sale, this alone may not explain the gulf between the price paid by the developer and market estimates prior to the announcement of the tender result. Many theories abound, and I do not intent to critique the merits of the transaction, but it is clear that other inputs also drive the investment criteria. This is not exclusive to the residential market.

Occupier demand in the office market has largely been subdued throughout the year but a two-tier market has emerged in Central since early last year. This has been driven by mainland Chinese companies, who are very specific in their requirements and show a distinct preference for certain buildings, principally One and Two IFC and Cheung Kong Centre, with isolated cases of mainland firms paying close to pre-global financial crisis rental levels to secure space in these buildings. It seems that the gravitas afforded by the addresses holds sway over cost considerations. Exchange Square is also highly desired and is a live option for mainland companies given the high occupancy rates and strong competition for space in the aforementioned buildings.

Some may scoff at the prices paid and pour scorn on a perceived lack of judgement. However, while the durability of certain business models may be questioned, many of these companies operate off very high margins and can quite easily afford high rents. Moreover, it is their clients that value such space and it is therefore quote logical for the occupier to ensure its bid is successful.