Property investors seen to focus on office and retail sectors

Prospective capital of office and retail sectors expected to grow 14% and 17% respectively during 2011.

Shortly after the government’s introduction of special stamp duty and guidelines to lower the loan-to-value ratio in November 2010, the level of speculation activity in the residential market substantially retreated. However, luxury residential prices remained relatively firm and the office sector continued strong in 4Q 2010, according to Colliers International’s latest The Knowledge report. This was mainly attributed to the sustained low borrowing rates in the marketplace and most vendors preferring to hold on their developments for a prolonged period.

“In the investment market in 4Q 2010, the office sector obviously stole the limelight, with aggressive bids by local investors and institutional buyers encouraged by the continued catch-up of office rentals,” said Simon Lo, Director of Research and Advisory, Colliers International Hong Kong. Looking forward, the office and retail sectors are anticipated to become the market focus, with prospective capital growth of 14% and 17% year-on-year (YoY), respectively, during 2011, according to a Colliers International report.

Office Market
In 4Q 2010, the office market was underpinned by the sustained expansionary demand attributed to the existing financial tenants and growing new demand from a number of private equities and overseas legal firms. Meanwhile, the average Grade A office vacancy was at 4.2% in 4Q 2010, which remained significantly below its long-term historical average of 7.0%.

Due to the fact that prevailing supply continued to fall short of demand, the average Grade A office rental grew further by 8.5% quarter-on-quarter (QoQ) in 4Q 2010 to HK$57.85 per sq ft per month as of November 2010. “The actual supply of office accommodation with one whole floor or more in a single building was extremely tight in 4Q 2010. In central business districts in particular, more tenants considered second-tier developments in the same locality as alternatives in order to cope with the current difficult supply situation,” said Simon.

Looking forward, the anticipated growth in the financial sector is expected to take the whole office market to another stage of growth in 2011. Over the next 12 months, Grade A office rentals are projected to rise 17%.

Luxury Residential Sector
Since the introduction of anti-speculation measures in mid-November, short-term property traders retreated significantly and the number of sales transactions in the luxury sector fell further by 20-30%. However, luxury residential prices continued to grow, given the sustained low interest rate environment and limited luxury residential supply. As of November 2010, the average transacted prices of luxury residential properties increased further by 4.6% QoQ to HK$18,189 per sq ft.

On the leasing front, newcomers from the banking and finance industries continued to be the largest contributors to the strong occupation demand in 4Q 2010 as the industries retained their optimistic outlook in the region. It supported further growth in the average luxury residential and serviced apartment rentals, increasing by 2.9% QoQ and 3.7% QoQ respectively as at November 2010.

Luxury residential prices are predicted to stage further growth if the US dollar remains weak, inflation continues to rise and the low interest rate environment prevails. Over the next 12 months, luxury residential prices and rentals are anticipated to rise 8% and 10% respectively.

Industrial Sector
The overall industrial market continued to enjoy spillover from the traditional office sector due to the sustained increase in office rentals. Both factory rentals and capital values continued to surge by 3.9% QoQ and 6.8% QoQ, respectively, in 4Q 2010, despite a mild contraction of volume due to the tightened loan-to-value ratios during the period. Meanwhile, the sales market of quality strata-titled premises was buoyant since industrialists were keen to acquire their units for long-term occupational purpose.

In anticipation of a slowdown of export growth in Hong Kong in 2011, the average industrial properties’ rental growth is projected to moderate to 10% for factory and I-O, and 8-10% for warehouse over the next 12 months. Meanwhile, the industrial properties’ prices are projected to increase 6-8%.

Retail Sector
Underpinned by the double-digit growth of retail sales and sustained leasing demand from international brand names, the average ground-floor retail rentals in the four traditional shopping districts, Central, Causeway Bay, Mong Kok and Tsim Sha Tsui, picked up at a faster growth momentum, increasing by 5.3% QoQ in 4Q 2010.

“Central and Tsim Sha Tsui were the two most popular sub-markets amongst most newcomers,” said Simon. “While overseas fashion retailers remained aggressive, local retailers were faced with greater competition in securing retail spaces on the back of rising inflation, landlords’ aggressive asking rents and reducing supply in the core shopping areas. As such, local retailers started to seek spaces in second-tier streets in the key shopping districts.”

Given the sustained economic growth and anticipated increase in inbound visitors, the local retail market will stage further growth. Over the next 12 months, retail rentals of ground-floor units in the traditional shopping districts are expected to edge up further by 20%.