HONG KONG

ASIA'S WORLD CITY

Expanding mainland Chinese firms transform market dynamics

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Mainland Chinese firms have shown renewed interest in Hong Kong’s property market, from commercial buildings to development sites, in the past two years, causing quite a stir in the local market.

Mainland companies, especially financial firms, have become the major demand driver for prime offices in Central and Admiralty, Hong Kong’s CBD. Thanks to the launch of bilateral financial agreements between Hong Kong and the mainland, such as the Shanghai-Hong Kong Stock Connect in 2014 and Mutual Fund Recognition in 2015, around 50% of new lettings in Central are to Mainland tenants. The influx of mainland tenants and their preference for Grade-A offices in the CBD has been the main contributor to soaring rents. In the past two years, Grade-A office rents in Central have surged 20%, leading some firms to relocate to the eastern part of Hong Kong Island.

LUXURY RESIDENTIAL LAND PRICE INDICES

To hedge against the risk of further rental rises, many mainland companies are looking to purchase offices for their own use, including setting up regional headquarters. Despite low yields and high entry costs, Chinese firms are keen to establish their presence in the city. Hong Kong, as an international financial centre with an independent judiciary and financial system, is increasingly being used as the first stop for Chinese outbound capital and a springboard to world markets.

There has been a significant upward trend in mainland firms purchasing Hong Kong office buildings over the past few years. In the first six months of 2016, U.S.$2.9bn worth of offices have been snapped up by mainland companies. Two Grade-A office buildings in Wanchai, an area adjacent to Admiralty, were sold recently – Mass Mutual Tower was acquired by Evergrande for U.S.$1.6bn and Dah Sing Finance Centre was bought by China Everbright Group for U.S.$1.28bn. In the past decade, mainland firms have acquired around U.S.$6.4bn worth of office properties in Hong Kong, accounting for about 10% of the total office transaction volume in the city.

Mainland developers are also eyeing Hong Kong’s development sites. Among these developers, China Overseas has been the most active, having bought four sites in Hong Kong since 2012. Last year, a record U.S.$905.8m was spent on a residential plot in Kowloon by Shimao Property, one of the major land deals in that neighbourhood. So far in 2016, mainland developers have already snapped up over U.S.$435.9m worth of land, or 25% of the total land transactions in Hong Kong.

Amid rising prices and yield compression in major gateway cities such as London and New York, China’s outbound real estate investors have now shown a renewed interest in Hong Kong, the key gateway city closer to home. 

“IN THE PAST TWO YEARS, GRADE-A OFFICE RENTS IN CENTRAL HAVE SURGED 20%, LEADING SOME FIRMS TO RELOCATE TO THE EAST OF HONG KONG ISLAND”

Developers are wary of the slower economic growth in the mainland and fierce domestic competition for land and funds. In comparison, Hong Kong does enjoy a relatively stable long- term outlook. Meanwhile, Hong Kong’s land price growth has been flat with the market expecting further U.S. interest rate hikes and strong future supply. In fact, in some parts of Hong Kong, land prices are even cheaper than prices in some of China’s major second tier cities. These have made Hong Kong’s land become more attractive to Mainland developers.

With further cross border integration, extensive transport links as well as the development of financial collaboration, such as the Shenzhen-Hong Kong Stock Connect and Hong Kong’s role as a Renminbi off-shore clearing centre, we expect to see heightened interest from north of the border in Hong Kong’s buildings and land in the next few years. 

 


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