Corporates’ positive sentiment and expansion plans buoy Grade A office purchases

Midland Business Information Research Department records show 285 industrial and commercial unit sales were recorded in September, down 19% month-on-month from 352 in August.

Industrial, office and retail property decreased across the board in September. Month-on-month industrial and retail transactions fell by about 26.5% and 14%, respectively, with 136 and 92 sales. Office transactions, however, dropped by about 5% MoM to 57. So far this year, 651 transactions have been recorded, 97.6% of the same period last year – 667.

Interest rates reached more than 6% last month, vastly increasing investment costs. Most commercial investors are not end users and prefer to put their money into savings. A few office owners recently significantly reduced their asking prices to attract buyers, opening a gap for occupiers to splash out on discounted stock.

In the last two weeks, four Grade A offices transacted with considerations of more than HK$100 million in Central, Sheung Wan, Kwun Tong and Tsim Sha Tsui. The most expensive was the 18,149 sq. ft., 28th floor of China Merchants Tower, Shun Tak Centre in Sheung Wan. Ownership changed hands for HK$778 million for a unit price of HK$42,867 per sq. ft., which was about 158% higher than the last time this floor transaction, which was for HK$301.546 million in 1997.

The new buyer, China Merchants Group, purchased the 32nd floor of China Merchants Tower as its Hong Kong operations headquarters in 2012. In 2013, it had 129 employees and now has 334. In addition, China Merchants Group also rents a total of 47,098 sq. ft. on other floors of the same building, making management inconvenient. Purchasing an entire floor will allow employees to work in one space, which will help strengthen company management.

The second transaction was the 23rd floor of the Bank of America Tower in Central, with three car parking spaces and a saleable area of 12,110 sq. ft. The bank owner sold the floor for about HK$338 million, with a unit price of about 27,911 per sq. ft.

This floor belonged to a mainland company that bought it in July 2018 for HK$701.8 million, with a unit rate of 57,952 per sq. ft. The property was foreclosed, and in 2022, the bank owner entrusted an agent to auction it for HK$500 million. Now sold for HK$338 million, it has depreciated by more than 50% in five years.

The Labour Department’s Protection of Wages on Insolvency Fund Board acquired the entire 21st floor of C-Bons International Centre, 108 Wai Yip Street, Kwun Tong. It has three car parking spaces and a total saleable area of 11,675 sq. ft. Transacting for HK232.5 million; its unit price is about HK$19,914.

The property had been held by a consortium comprising Angelo Gordon and the Chellaram family. They purchased it in 2018 for a consideration of HK$218.478 million, so they took about HK$14 million or 6% in profit.

The entire 7th floor of Railway Plaza, 37-43 Chatham Road South in Tsim Sha Tsui, was transacted for HK$104 million. Its saleable area of about 7,673 sq. ft. fetched a unit rate of HK$13,554 per sq. ft. The seller is a Singapore company that purchased it in 2010 for HK$76.682 million and was asking HK$130 million. They had to take a discount of roughly 20%. After holding the title for 13 years, the seller made a book profit of about HK$27.3 million, for approximately 31% appreciation.

Office Stratified Transactions Over HK$100 Million (Jan - Sep)

If any of the properties in the cases above were to be leased out, their yield would only range from 1.74% to 3.01%, which can’t cover the latest ceiling cap rate of 4.125% to 5.125% for financing. So, investors are leery despite the opportunity to bottom fish.

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Given the high interest and vacancy rates in Grade A office buildings, investor appetite has waned. In contrast, some corporates are looking for more space and are taking advantage of the hefty sales discounts. Therefore, the proportion of users entering the market to purchase large office space has increased significantly.