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HONG KONG: Prospects of a value-adding facelift to Admiralty's office precinct after the opening of new government headquarters in the area have driven prices of grade-A offices above their previous market peaks in 1994 and 1997.
Until recently, office prices had lagged behind the rebound in the luxury residential and retail sectors that took prices to new market peaks in 2007.
"But all grade-A office prices in Admiralty and Central went beyond their previous peak levels after sharp increases in the first quarter," said Eric Ong, sales director of the office department at property agency Midland IC&I.
Average grade-A office prices in Admiralty rose 15% in the first quarter, and offices in the 31-year-old Admiralty Centre were the latest to hit records when a 10,918 square foot unit on the 21st floor was sold last week for about HK$197 million (RM75.5 million), or HK$18,000 per square foot.
During the market peak of 1994, the highest price for the office unit at Admiralty Centre was just HK$13,000 per square foot, according to transaction data from Centaline Commercial.
The vendor bought the unit for about HK$104 million in October 2009 — a surge of 89% in less than two years.
A 1,308 sqft unit in Far East Finance Centre in the area sold for HK$26,758 per square foot earlier this month, 9% higher than the previous record high of HK$24,550 in 1997.
"Buyers are expecting that the image of Admiralty will improve after the new government headquarters are completed and occupied at the end of this year," said Desmond Poon, an associate director at property agency Chartersince Realty. "The opening will represent a new landmark for Hong Kong and they expect the office market will benefit."
In Central, offices at Nine Queen's Road also hit a record last month when an investor bought the 20th floor for HK$378 million, or HK$27,500 per square foot, from Henderson Land Development chairman Lee Shau-kee and a related party. That was up 31% on the previous record of HK$21,000 per square foot recorded in 1994.
"Offices were cheaper than luxury residential and retail properties since their prices had lagged behind the market recovery for so many years. This attracted investors who saw that office rents were rising because of the lack of new supply and the positive economic performance," Ong said.
The government's introduction of cooling measures targeted at the residential market added to the alternative attractions of offices, making commercial properties a more flexible investment than residential properties which attracted additional stamp duty if resold within two years, he said.
"Office rents rose 10 to 15% in the first quarter. That's why buyers could still enjoy rental yields of 3%, even though office prices rose to more than HK$20,000 per square foot in the same period."
However, the change in sentiment towards buying offices attracted a new breed of more aggressive investors, Ong said.
"The office investment market used to be dominated by several veteran investors. But in this cycle, there are more individual buyers and newcomers. These veterans have shifted their focus to the stock or grade-B office markets, which may be a response to their concern that prices of grade-A offices have risen too far."
Poon said there were fewer mainland buyers in the market than before and the new investors in the office market included industrialists and owners of trading firms, who found it easier to get loans from banks. As the new investors were in a rush to enter the office market, they were less cautious about the price inflation in prime areas.
"Even though buyers were aggressive in buying office properties in 1994 and 1997, they would hire architects to verify the area of the office units and require agents to issue certificates to indicate the saleable area of the units," Poon said. "But now none of the buyers care about how much the floor area may have been inflated and they don't require certificates."
Poon said the efficiency rate of office units was about 65% at present, compared with 70% during the market peak.
"That means the average price of the office units is much higher than the market peaks in term of saleable area."
Ong expects office prices will continue to rise this year.
"Prices of grade-A offices will grow a further 30% by the end of this year. Office prices in Admiralty will hit HK$30,000 per square foot," he said. — SCMP
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