Commercial Property Market Faced Ongoing Challenges

• High cost of funding and worsening debt situations in Mainland China dampen investment sentiment.
  
  
• State-owned enterprises (SOEs) make notable investments in the hospitality sector.
  
  
• Subdued commercial investment market, with only one en-bloc distressed office sale recorded in Q3.
  
  
• Retail sales experience significant YoY growth, but cross-border shopping impacts local market.
  
  
• Investment market influenced by high interest rates and cautious lending policies. However, hotels show potential for recovery, but escalating prices may limit transaction volume in the near future.
  
  
• According to Savills' price forecast for 2024, the Grade A office market is projected to decline by 5%, while prime street shop prices may range from 0 to 5%.

High cost of funding and softening economy dampen investment sentiment
The high cost of funding remains a significant concern for the local property investment market, with 3-month HIBOR standing at 5.2% at the end of Q3/2023. The ongoing softening of the Mainland China economy and the worsening debt situations of many Mainland developers and related financial institutions have further dampened investment sentiment. Mainland capital, previously a key source of funding for major transactions, has become even scarcer in the market.

Hospitality sector: state-owned enterprises show presence
State-owned enterprises (SOEs) continue to demonstrate their presence in the hospitality sector. Notably, China Tourism Group acquired De Fenwick, a serviced apartment in Wanchai, for HK$900 million. Plans for a joint redevelopment project with their existing property, the Kew Green Hotel Wanchai, are underway. Notably, this purchase marks their second hotel asset acquisition of the year, following their previous investment of HK$3.4 billion in the Kimberly Hotel located in Tsim Sha Tsui. SOEs remain active in the sector, indicating their confidence.

Commercial investment market: limited activity
The commercial investment market remained subdued, with only one en-bloc transaction involving a distressed Grade B office sale at 28 Austin Avenue in Jordan recorded, which sold for HK$138 million with vacant possession. End users continued to show interest in the strata office market, with 28/F of Shun Tak Centre, China Merchants Tower, selling for HK$778 million (HK$30,635 per square foot) to China Merchants. More receivers' en-bloc assets, primarily those previously held by troubled Mainland developers, are expected to be put on the market for sales, but the success of these sales may depend on banks' willingness to compromise given weak market sentiment and relatively high LTVs of these assets.

Retail sector: growth and cross-border impact
Retail sales in Hong Kong experienced a significant 19% year-on-year growth. However, the appeal of larger shopping malls in Shenzhen, which offer a wider range of shopping and dining options at discounted prices attracted young Hongkongers, resulting in a considerable number of cross-border trips during the weekends. As a result, only retail deals with high yields have been recorded in the past three months. Retail podiums with a value exceeding HK$500 million were transacted with yields of 5% or more, while smaller-cap retail podiums ranging from HK$100 million to HK$250 million were sold with yields around 3.5% to 4%. The latter category, in particular, was predominantly acquired by local investors residing within the respective districts.

Office sector: challenges and diverging views
The office sector in Hong Kong continues to grapple with oversupply, leading to projected rental declines. However, there are conflicting perspectives in the sales market. The recent sale of 23/F in Bank of America Tower at a 50% discount indicates concerns, while the transaction of 23/F in Capital Centre at a 20% premium over the previous purchase price from less than 10 months ago reflects a more positive outlook. These disparities indicate differing perspectives on the prospects of the office sector in the near term, even among end users.

Investment Outlook: increasing interest in hotels
There is an increasing interest in hotels, driven not only by their potential for conversion into other short-term accommodation products but also by the genuine recovery of the sector. It is anticipated that Revenue per Available Room (RevPAR) will rebound by approximately 60% in 2023, falling only 10% below the pre-COVID levels of 2018. However, the escalating price per key for hotels on the market may result in limited transaction volume for the sector in the near future.

Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “Notably, interest in the office sector remained limited to end users, while market attention gravitated towards high yielding retail assets. Additionally, the hotel sector continued to attract favour from Mainland capital.”

Mr. Peter Yuen, Managing Director, Investment & Sales of Savills said, “Looking ahead, the investment market is expected to continue being influenced by high interest rates and cautious lending policies by banks toward property loans. Demand for office and retail spaces is likely to come from both end users and local investors who have specific usage requirements or a special interest in their acquisition targets.”