En-bloc commercial volumes staged a modest rebound in Q3 with seven transactions registered totalling around HK$4 billion, as both local and Mainland investors returned for either high-yielding properties or older buildings with redevelopment potential.
The shift to staycations and the rising numbers of local guests meant a rebound in hotel performance given the strict border controls: the latest hotel occupancy, though still hovering around 50% in July, was already sharply up from 30% in February / March, while the year-on-year decline in room rates also slowed from around 40% in March / April to around 22% in July. With hotel performance showing signs of stabilizing, and with more landlords willing to offload their holdings, investors rediscovered their appetite for this segment with two boutique hotels sold over the quarter, one to a Mainland company and the other to a local investor.
Strata-title segment was again subdued with the third wave of COVID cases delaying the anticipated recovery in the economy as well as the commercial investment market. Despite the setbacks, commercial (office and retail) transaction volumes actually rebounded slightly in July and August (261 transactions, compared with 237 transactions from April to June), with more vendors willing to accept price reductions.
While the US Fed announced its intention to keep interest rates at current levels, the recent relaxation of the commercial mortgage LTV from 40% to 50% by the HKMA was thought to be a major catalyst behind the revival of the commercial market. Nevertheless, even with higher LTVs, most banks took a prudent attitude towards commercial mortgage lending, mainly reflecting their conservative valuations, which were usually 10% to 30% below proposed transaction prices, thereby eliminating any potential upside from the new policy. As such, cash-strapped investors, or those without a long-standing banking relationship, were hindered from re-entering the commercial market even at a time of ultra-low interest rates.
While high-end retail continued to suffer, retailers in the F&B, mid-priced cosmetics and health products segments have taken prime street shops on Kai Chiu Road in Causeway Bay, Wellington Street in Central and Haiphong Road in Tsim Sha Tsui. These were deals they could not have afforded a few years ago, but were made possible in recent months by core retail landlords slashing rents by 40% to 50% compared to the previous lease signed three years ago. With most prime street landlords still preferring rental rather than price reductions, transactions in core retail areas have been rare with prices adjusting slightly by 4.7% in Q3/2020.
Suburban retail performed well with its necessities focus, and new investors were attracted to this segment as a result. Both University of Hong Kong and UOW College have bought the retail podiums of new residential developments in suburban areas for HK$459 and HK$457 million respectively for owner occupation as education centres. Meanwhile, an industrialist, who has been inactive in the market over the past seven to eight years, bought Mount Sterling Mall in Mei Foo for HK$300 million, while another investor, who used to buy residential properties, bought the retail podium of OASIS Place in Kai Tak for HK$200 million, both eyeing long-term investment.
More Mainland buyers re-entered the en-bloc market, while some left the stratified segment due to financial concerns. It is still premature to predict a full-blown return of Mainland money, with their investment in both income-producing assets and development sites in Hong Kong still registering notable declines (-90% and -73% y-o-y in 1H/2020 respectively). Nevertheless, the increasingly difficult investment environment elsewhere, in particular in the US and some parts of Europe where political tensions are mounting, may push some of SOEs back to the Hong Kong property market for portfolio diversification.
Mr. Simon Smith, Senior Director, Research & Consultancy commented: “The rebound in COVID cases has delayed the anticipated recovery in the commercial investment market, with the retail sector again bearing the brunt, though suburban retail continued to perform well and attracted some investment interest.”
Mr. Peter Yuen, Managing Director, Head of Investment and Sales said: “We are seeing selective signs of activity in the commercial market with en-bloc deals, hotels and even strata-title activity all showing a modest uptick. A broadly supportive policy environment has been important.”
Ms. Sharon Fong, Senior Director, Retail Sales commented: “Retail continues to adjust to a new reality with a greater emphasis on local demand which has in turn stimulated interest in suburban assets.”