HK office prices, down by half, may rebound

The average price of prime office units in the Central business district may rise to HK$13,000 (US$1,680) a square foot by year-end from HK$11,167 in May as rich individuals seek alternative investments to stocks and bank savings, Benedict Ma, an analyst at CB Richard Ellis, said in an interview Tuesday.

Low borrowing costs and bank-savings rates of almost zero are prompting investors to buy office space in Hong Kong, where rents are the world's fourth-highest. The benchmark three-month interbank loan rate fell to a four-year low as liquidity surged after Hong Kong issued record amounts of the local currency to preserve its fixed exchange rate.

“A lot of the activity in the strata office market is not fundamentally driven, it's much more speculative as rents are still falling,” Rhodri James, executive director of office services at CB Richard Ellis, said Tuesday.

“The key thing is do we see the economy turning around in six to 12 months? This justifies why they are buying today.”

The strata market refers to units or floors, instead of whole buildings: there are four such prime office buildings in Central and neighboring Admiralty, according to CB Richard Ellis. Average prices fell as much as 49 percent from their peak of HK$16,900 after Lehman collapsed in September, Ma said.

There were four sales of prime office strata units exceeding HK$100 million in value between January and May, compared with 21 in the first half of 2008, James said.

Still, gains in office prices may leave investors “exposed” if the economy and rents fail to recover in the next six to 12 months, James said.

Job cuts by HSBC, Television Broadcasts Ltd. and PCCW Ltd. pushed Hong Kong's unemployment rate to a three-year high of 5.3 percent in May. The economy contracted 7.8 percent in the first quarter from a year earlier as exports slid the most since 1954.

Some investors may expect real estate to rebound first. The Hang Seng Property Index, tracking six of the city's largest developers, has gained 35 percent this year, compared with the 24 percent increase in the benchmark Hang Seng Index.

Billionaire Lee Shau-kee, Henderson Land Development Co. chairman, sold a floor of office space at The Galleria on Queen's Road Central for HK$18,000 a square foot earlier this month, 59 percent more than another floor in the same building sold for in May, Sing Tao reported on June 11. Bonnie Ngan, a Henderson spokeswoman, declined to comment on the report.

The value of office space is rising even as falling rents cut yields to 3.9 percent from 5 percent at the end of 2008, CB Richard Ellis said. By comparison, a HK$150,000 deposit with HSBC Holdings Plc., the bank with the most branches in Hong Kong, generates annual interest of 0.001 percent, or HK$1.50.

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