As a result of quantitative easing and the flood of liquidity while interest rates have been kept at near zero, not only equities but also property prices have been driven up over the first half of 2009.
As a result of quantitative easing and the flood of liquidity while interest rates have been kept at near zero, not only equities but also property prices have been driven up over the first half of 2009. Grade ‘A’ office prices increased dramatically by 35% in Q2 after a 5% rebound in Q1, with investors re-entering the market. The office sales market remains positive in the second half as prices have not yet fully returned to their peak in 2008, according to Savills Hong Kong.
On the leasing side, Grade ‘A’ office rents have continued their downward adjustment falling by 5.8% over Q2/2009, while rents in Central declined by 7.8% over the same period. The results indicate that the rate of decline of office rents has slowed, suggesting that we are approaching the bottom of the current down cycle.
Rental Decline Has Slowed
Overall Grade ‘A’ office rents in Hong Kong have been falling for four consecutive quarters since Q3/2008. Rents continued to fall by 5.8% over Q2/2009, following a drop of 10.2% in Q1/2009.
“Sentiment in Central was not entirely negative as several Mainland companies, mainly from the real estate and finance industries, are looking for new setups and relocation opportunities in prime buildings. Rents in prime buildings (Grade ‘AAA’) in Central recorded a 10% downward adjustment over Q2/2009,” commented Simon Smith, Savills’ Senior Director and Head of Research & Consultancy.
As the stock market has rebounded since early 2009, and mainland IPOs have begun to make a comeback, we expect to see more demand from financial services in the coming months. Some international banks have already unfrozen headcount and are hiring selectively. Vacancy rates in Central increased slightly to 6% at the end of June.
“Grade ‘A’ office rents in Central have fallen by around 33% from their peak in Q2/2008. We expect the rate of decline of Grade ‘A’ office rents to slow over the second half and record another 10% to 15% downward shift over the remainder of 2009 before stabilising,” said Simon Smith.
Office Price Rises Accelerate as Investors Re-enter the Market
Investors are becoming active again in Q2/2009, following end users driven demand earlier this year. “Banks are fighting for mortgage businesses, and interest rates remain as low as nearly zero. As inflationary expectations are rising, investors see property as a safe haven for investment, despite the fact that rents have continued their downward adjustment. Investors have been aggressively looking for quality assets in prime areas, hence prices have been pushed higher,” said Peter Yuen, Savills’ Senior Director and Head of Investment and Sales (Hong Kong & Macau).
Overall Grade ‘A’ office prices have rebounded since Q1/2009, and recorded 34.7% growth in Q2/2009.
Transaction prices of popular strata titled buildings in Central have subsequently shot up. The average price per sq.ft. of Shun Tak Centre, which was around HK$8,000 in Q1, jumped to HK$11,000 in Q2. Similarly, Prices of 9 Queen’s Road Central and Lippo Centre have gone up over 70%, to HK$15,800 and HK$12,000 per sq.ft. respectively.
“The office sales market should remain positive in the second half of the year, especially if interest rates remain low and the global economy gets back on track. We are already noticing some life in the leasing markets and this should help to support current yields which, even after a period of steep compression, are above the cost of capital,” said Peter Yuen.