Hong Kong Firms Turn to Office Purchases as Property Prices Fall

Falling office prices and lower borrowing costs are encouraging banks, mainland Chinese companies and universities to purchase office space in Hong Kong rather than continue leasing, as buyers gain confidence that the commercial property market has undergone a significant price adjustment.

Grade A office prices were around 49% below their 2018 peak in the second quarter, according to Savills. The property consultancy said investment activity has improved as office prices have become more realistic.

Jack Tong, director of research and consultancy at Savills (Hong Kong) Ltd., said properties with strong fundamentals, potential for conversion and demand from owner-occupiers are likely to perform better over the next 12 months.

Office properties accounted for the largest portion of Hong Kong’s commercial property transactions as investors became increasingly confident that prices had fallen enough to create opportunities for recovery, according to Rosanna Tang, deputy managing director and head of research for Hong Kong at Cushman & Wakefield Ltd.

Hong Kong’s large non-residential property transactions increased 84% year on year to $23.2 billion during the first half of the year, Cushman & Wakefield data showed.

Banks and Universities Enter the Market

DBS Bank (Hong Kong) Ltd.’s purchase of six floors at The Center for about $2.5 billion is one example of financially strong occupiers taking advantage of lower office prices. Tong said Central and Admiralty are among the most attractive locations for buyers because of their accessibility, efficient office layouts and prices that are below replacement cost.

Educational institutions are also becoming more active in the commercial property market. Reeves Yan, head of capital markets at CBRE Advisory Hong Kong Ltd., said universities and other educational organisations are increasingly participating as buyers.

The University of Hong Kong recently acquired 92–103A Connaught Road West for nearly $4 billion, making it one of the largest recent property transactions in the market.

Yan also noted growing investor interest in properties that can be repositioned, distressed assets and receiver sales, indicating that some investors are looking beyond conventional office investments for opportunities created by the market downturn.

Lower Borrowing Costs Change the Investment Equation

Owner-occupiers are becoming more active in strata-title offices in areas including Admiralty, Sheung Wan and the fringe of Central, according to Oscar Chan, head of capital markets at Jones Lang LaSalle Ltd.

Chan said the cost of financing has been an important factor behind the change in buyer behaviour. The Hong Kong Interbank Offered Rate has fallen to around 2%–3%, reducing financing costs for property buyers.

For several years, property owners could face situations where interest expenses exceeded rental income. According to Chan, that gap has now closed for well-leased secondary properties, making ownership more attractive for some investors.

Investors Look Beyond Traditional Offices

The search for value is also extending beyond conventional office buildings. Investors are showing interest in hotels, en-bloc residential properties and Grade B commercial buildings that could potentially be converted into student accommodation.

One example is Wee Hur Holdings Ltd.’s purchase of One Bedford Place in Tai Kok Tsui for $748.8 million for a student-housing project. Savills also highlighted Centaline Strategic Investments Ltd.’s acquisition of the Regal Oriental Hotel for a similar purpose.

The trend reflects growing interest in alternative uses for commercial properties as investors look for assets that can generate value through redevelopment or conversion.

Southeast Asian Capital Gains Importance

Investors from Southeast Asia are also becoming an increasingly important source of capital for Hong Kong property transactions.

Singaporean buyers accounted for more than 60% of inbound international investment during the second quarter, according to Thomas Chak, head of capital markets and investment services at Colliers International (Hong Kong) Ltd.

Chak said family offices, private wealth investors and institutional funds seeking opportunities created by the market downturn are expected to become increasingly active.

However, financing conditions remain an important risk for the commercial property market. Chan warned that higher US interest rates could increase borrowing costs, while Tong expects restructuring, receivership and distressed property sales to continue affecting parts of Hong Kong’s commercial real estate sector.