Ominous signs: A woman jogs past a residential project developed by Sun Hung Kai Properties in Hong Kong. The city’s biggest builder is cautious despite the robust demand for its apartments. — Bloomberg
AS Hong Kong’s commercial landlords and real estate agents are finding out, a border reopening and the return of Chinese visitors do not necessarily spell a universal boom to the city.
Restaurants, especially in the Central business district, are full. The Clockenflap Music and Arts Festival is drawing crowds.
In the evenings, people swarm in and out of shops in Causeway Bay, once home to the world’s most expensive retail space.
Meanwhile, apartment sales are picking up, with the city’s biggest developers offloading hundreds of flats within days. It’s a huge relief after a painful 2022 when transaction volumes sank to the lowest in decades.
But there are ominous signs. Sun Hung Kai Properties Ltd recently bought a prime commercial site, which will eventually house “the second tallest landmark building in Kowloon,” for HK$4.73bil (US$603mil or RM2.7bil), far short of the HK$7.3bil to HK$12bil (RM4.2bil to RM6.9bil) range the land was expected to fetch.
So why is the city’s biggest builder so cautious despite robust demand for its apartments?
This sale underscores the business elites’ scepticism toward Hong Kong’s economic recovery, and by extension, its property rebound.
Last year, vacancy at Grade-A office buildings hit an all-time high of about 15%, according to CBRE, a commercial real estate services provider.
Financial companies are by far the largest tenants, accounting for 27% of total leasing volume. But as Western investment banks scale back their China exposure and cut jobs, who will assume those pricey leases?
Ghost town
Hong Kong’s office vacancy rate soared during the pandemic.
There are few takers.
Government agencies are also active in this space, accounting for 9% of total leasing volume.
However, they mostly rent in the less expensive areas, such as Kowloon.
Realtors are pinning their hopes on the return of mainland enterprises, after the border reopening. But instead of offices, Chinese companies seem more keen on industrial buildings.
A case in point: State-owned China Resources Group was the largest investor in the city’s commercial real estate last year, shelling out HK$7.8bil (RM4.5bil) on four transactions.
In May, a logistics subsidiary bought a pair of warehouses from Kerry Properties Ltd for HK$4.6bil (RM2.6bil).
Despite an ongoing trade war with the United States, only 2.5% of Hong Kong’s warehouses are vacant, according to CBRE.
Some of the divergence in vacancy rates is due to supply.
Last year, Hong Kong was flooded with 4.3 million sq ft of new office space, the highest since 2008, even though commitments to the new stock were few and far between, with just 20% absorbed by year-end.
Much of the incremental supply came from the east of Kowloon, where the government is redeveloping the city’s old commercial airport into a major business district.
A flashy city
Hong Kong has been developing a lot of office buildings but not enough warehouses.
New warehouse space, on the other hand, has been sparse.
This year, we can expect 5.4 million sq ft coming to the market, the highest since 1992.
However, that will be from a joint-venture project that Alibaba Group Holding Ltd’s logistics unit Cainiao Network is developing at the Hong Kong International Airport.
Half of that space is for its own use.
As Hong Kong limps out of a self-imposed isolation, we are confronted with a messy, uneven recovery.
Commercial property, which over the years has been a reliable and timely barometer of business sentiment, reflects just that.
It is thus worth wondering if the government has the right policies. Chief executive John Lee seems keen to reclaim Hong Kong’s throne as Asia’s preeminent financial hub, even as global banks reduce headcount.
Meanwhile, its importance in international trade is put on the back burner. The city’s commercial real estate market is telling him that it is time to retool his focus. —Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. The views expressed here are the writer’s own.
