23 October 2016
Demand for office space will remain robust in Hong Kong, helping the sector outshine other segments in the property market. Photo: HKEJ
Demand for office space will remain robust in Hong Kong, helping the sector outshine other segments in the property market. Photo: HKEJ

Why office properties will continue to outshine retail units

Benign interest rates and low supply have helped Hong Kong’s commercial as well as residential property markets post further price gains this year.

In the first ten months of 2015, prices of office buildings and shops rose 8.1 percent and 4.3 percent on average respectively, while home prices surged 8.7 percent.

Compared to 2003 levels, which was the bottom of the previous cycle, prices of office buildings and shops are 7.2 times and 6.2 times higher respectively, a bigger increase than the 4.2 multiple seen in home prices.

The outstanding rise in office property prices is mainly due to Hong Kong’s elevated strength as an international financial center. The latest Global Financial Centers Index has Hong Kong in the third place after London and New York, with small differences in the scores.

The outlook for office buildings is bright as Hong Kong will continue to be a bridge between mainland China and foreign companies.

According to official data, 7,904 overseas companies have set up offices in Hong Kong. Of those, 1,401 were regional headquarters, while 2,397 were regional offices and 4,106 constituted local branch offices. The overall number marks a new high, with the figure up about 20 percent than the level seen five years ago.

In addition, Hong Kong will continue to benefit from China’s opening up of its financial sector, as well as the nation’s ‘One Belt One Road’ initiative and the 13th Five-Year plan. The financial markets of Hong Kong and mainland will forge deeper links with each other.

These factors will help attract more overseas and mainland companies to expand business in Hong Kong, creating demand for office buildings.

Meanwhile, the relatively weak performance of shop price growth is mainly due to a slowdown in retail sales and tourism sector.

In the first ten months of this year, tourist arrivals in Hong Kong were down 0.8 percent from a year ago and retail sales fell 2.7 percent. Shop rent cuts and vacancies can be seen in core areas.

In previous years, rent of shops in core areas rose significantly thanks to a huge influx of mainland travelers and international brands that sought to cash in on the tourists. The present correction is reasonable. Core area shops account for only a small percentage of the overall retail outlets in the city.

As employment levels, household incomes and home prices remain stable in the city, retail businesses that have larger exposure to local consumption will do well.

The tenancy period for commercial properties is relatively longer, so the rent levels at renewed tenancy contracts are still higher than the prices agreed upon when the initial contracts were signed four or five years ago, despite some adjustment in recent months.

The overall rent and price levels of commercial properties are thus stable, statistically.

The slowdown in the tourism sector can be attributed to several factors, including a sluggish global economy, stronger Hong Kong dollar, negative local news, lack of new tourism attractions, policy adjustments in the mainland individual travel scheme and friendlier visa arrangements for the Chinese by other nations.

These factors will continue to influence Hong Kong’s tourism industry and create some downward pressure on rents and prices of shops, especially those located near popular tourist attractions.

This article appeared in the Hong Kong Economic Journal on Dec. 10.

Translation by Myssie You

[Chinese version中文版]

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Senior economist at BOCHK

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