HK-Office-1Q-2014.pdf Jul. 2014 | Page 2

Yield rates normalization Play safe Due to expectations of rent softening, and the increase in transaction costs arising from double stamp duty, the overall volume of the investment sales market activity plummeted 39% to HK$3.4 billion in 1Q 2014. With the exception of government land sales, there were no whole-block transactions concluded during the period. Several strata-title sales occurred as smaller owners were more flexible with pricing. Further to the acquisition of a commercial site in Kowloon Bay by Swire Properties in November 2013, Mapletree, a real estate investment trust, ventured into the market by acquiring a commercial site in Kwun Tong for HK$3.77 billion (an accommodation value of HK$5,708 per sq ft). The deal not only translates into a higher than expected unit price tag but is also a vote of confidence by foreign players. Colliers View Hong Kong Grade A Office Yield 9.0% 8.0% Yield (% per annum) 7.0% 6.0% Long-term average 4.6% 5.0% 4.0% 3.0% 2.0% 1.0% Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 0.0% Source: HKSAR Government Kowloon East is not a new story, however, many are unaware of the magnitude of its likely impact on the Hong Kong landscape over the next 10 years, as the area is gradually transformed into a commercial hub three times the size of Central. What we have seen over the past 8 years is the introduction of new tenants including insurers, financial services and multi-national corporations engaged in wholesale and distribution. The current trend is the broadening of investor profile from traditional property developers to long-term investors and investment funds. Despite the short-term market volatility, the sub-market of Kowloon East; comprising both Kowloon Bay and Kwun Tong, remains appealing to investors who are looking for value-add opportunities on a medium to long-term time frame. Colliers View The average cap rate was flat at 2.9% in 1Q 2014. However, the change of rental expectations, the imminent threat of increasing interest rates and the general rise of funding costs have prompted more prospective office buyers to demand a wider yield spread. The result will be gradual restoration of the current ultra-low yield rates back to its long-term average of 4.6%; similar to the spikes which occurred in 2005 and 2008. The full spike may not materialise in 2014, however an increase of 25 basis points is very likely. As such, it is our view that office prices will see a steeper downward adjustment in the order of 10% in 2014. 485 offices in 63 countries on 6 continents $2.1 billion in annual revenue 1.46 billion square feet under management Copyright © 2014 Colliers International. United States: 146 Canada: 44 Latin America: 25 Asia: 38 ANZ: 148 EMEA: 15,800 professionals and staff 84 Authors: Richard Kirke Managing Director | Hong Kong [phone] [email protected] Individual Licence: E-279867 Simon Lo Executive Director Research & Advisory | Asia [phone] [email protected] Jessy Chung Analyst | Research & Advisory [phone] [email protected] The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Colliers International (Hong Kong) Limited Suite 5701 Central Plaza 18 Harbour Road, Wanchai, Hong Kong TEL [phone] Company Licence No: C-006052