by Bruce Walker
The widely held belief that the stock market and property market were inextricably entwined has now been disproved by the strong performance of the property market since the October crash.
Demands for all sectors of the market is still strong with office rents and sales prices in Central and nearby satellite areas surging ahead.
Hongkong Land have now achieved $HK40 per sq ft on a space in Exchange Square III and, on the sale side, floors in Fairmont House and Bank of America Tower have achieved $HK2,800 per sq ft and $HK3,134 per sq ft respectively.
The trend in industrial take-up is more towards leasing rather than purchase, but demand is still strong, especially from overseas companies.
Large residential apartment rents are adjusting to the adequate supply situation, with no noticeable movement in rental levels over the first quarter of the year, but quality property for owner-occupation is still achieving high prices.
Land
The October crash had an immediate effect on land prices in the succeeding three months but prices bounded back to pre-October levels by March, reflecting property developers’ regained confidence in the market.
Notable government auction sales in January and March were both in Tuen Mun. In January, a site for a concrete batching plant reached $HK109m for 87,447 sq ft after keen bidding. In March, Sino bought a 142,000-sq ft residential site for $HK213m, showing $HK495 per sq ft accommodation value, which is a 25% increase over a sale of similar land in November.
A site for industrial use in Fanling was sold in the March auction for $HK27.5m, after having been re-entered by the government subsequent to its sale for $HK28m in September.
In the private market, notable sales included the sale of a site in the prestigious Severn Road on the Peak for $HK23.7m, showing an A/V of $HK970 per sq ft. Also, 40 Island Road sold in January for $HK22.6m at an A/V of $HK1,070 per sq ft for redevelopment.
Sites for development continue to be sought after in both the private market and by government auction, which reflects future confidence in resale prices of units over the next two years.
Offices
With Bond Centre 80% leased, Pacific Place 94% leased, Shui On Centre 100% leased and Harcourt House 100% leased, the availability of new quality office space on Hong Kong side is declining. The last quarter has seen rapidly rising rents, with Exchange Square Tower III breaking a new record of $HK40 per sq ft for small premises. Core Central rents are now averaging between $HK32 and $HK36 per sq ft for prime buildings.
Rents have started to climb again in the Admiralty district, with levels in Bank of America Tower reaching $HK31 on the net area, $HK25 on the gross area in Far East Finance Centre and as high as $HK28 per sq ft in the Bond Centre, on the net area.
Current relative stability in the stock markets, combined with the rapid increase in rents, has resulted in an increase in turnover of vacant possession sales.
In Central, Wanchai and Causeway Bay, we expect rents to continue to rise sharply over the next quarter as supply fails to meet demand from a wide range of space-users.
We have seen the office leasing market in Kowloon District ease up during the last quarter owing to new supply. In the Tsim Sha Tsui area, the major new developments which will become available are Chinachem Golden Plaza in Tsim Sha Tsui East; China Hong Kong City and Sun Plaza in Canton Road; and Polly Commercial Building in Prat Avenue. These four schemes will provide a total of close to 2m sq ft of new space.
One recent significant letting was Li & Fung Trading Co, taking the whole of a 135,000-sq ft block in China Hong Kong City.
In Tsim Sha Tsui area, however, owners are unwilling to reduce prices owing to the quick recovery in the market and the steady upward movement of rents. Magan Commercial Building in Cameron Road, with a total floor area of 38,000 sq ft, was sold early this year at $HK69.82m, representing an initial return of 9%.
In Yaumatei and Mongkok areas, there are three new commercial buildings available to lease and one for sale on a floor-by-floor basis. Kowloon Building, Hamilton Commercial and JCG Building are quoting rents of $HK12 to $HK14 per sq ft. All 11 floors in the Mau Lam Commercial Building were sold within one week, averaging $HK1,200 per sq ft gross.
Retail
Activity within the retail market has resumed after the Chinese New Year, with retailers gearing up and making new moves.
Department store operators have been seen to be extremely confident, and Yohan Department Store have just announced the location of their fourth store in Hong Kong. A commitment has been made to lease 200,000 sq ft of retail space in a three-star hotel in Tsuen Wan with the developers, the Hopewell Group, which will be ready by 1990.
Lane Crawford are also to open a new store of 65,000 sq ft in Pacific Place, Queensway, and we foresee more and more department stores opening outlets in new town areas.
The supply of new retail space available within shopping centres in the Tsim Sha Tsui area will be increased significantly with the completion of Sun Plaza and The China Hong Kong City towards the middle of 1988. Preletting is in progress and these new projects will provide a combined total of some 450,000 sq ft.
There has also been increased activity by both end-users and investors acquiring properties owing to high rent, low financing costs, high yield and the threat of negative interest rates on large Hong Kong dollar fixed deposit.
A notable recent transaction was the basement and ground floor of BCC Building in Carnarvon Road, Tsim Sha Tsui, which was sold at $HK77.8m to a local private investor. The initial rate of return is 8%.
Industrial
We have seen an increase in demand for industrial space for the first three months of 1988, following the low activity in the last quarter of 1987.
Before the crash, demand had been from all industrial sectors but for the last quarter it has been limited mainly to garments, electronics and warehousing operators, with more emphasis being placed on leasing rather than purchasing.
After a slight decline in prices and rents after the crash, there has been a small increase in prices in prime locations but for less popular industrial areas such as Tuen Mun and Yau Tong, prices and rents have remained steady. The improvement in demand appears to be a result of strong order books already secured from the previous year. Also, overseas companies have been coming on strong with many companies wishing to set up their operations in Hong Kong.
We expect the level of activity to remain high for the coming nine months, with prices and rents steady.
Residential
On Hong Kong Island, rents for prime luxury residential units have generally stabilised with no great movements in either direction. Demand is steady and there is enough supply to cater for this demand. Premium prices are being paid for units in developments reflecting the difficulty of purchasing in popular locations. A recent sale of a low floor unit in Wisdom Court, Mid-Levels, at $HK1,820 per sq ft reflects this view.
New developments being offered to the sales market are being rapidly taken up and demand is likely to remain strong in the short term, especially in the South Side of Hong Kong, where there are no new major schemes due for completion before the end of the year.
On Kowloon side there remains steady interest in the buying of good-quality houses, especially in the Sai Kung and Clearwater Bay areas. A Malaysian consortium purchased 18 duplex houses at Marina Cove in Sai Kung for $HK40m: they range in size from 2,000 to 3,000 sq ft and the average price is around $HK1,000 per sq ft. With regard to the leasing side of luxury residential properties, activity remains steady.
Prices of small- to medium-sized flats have regained ground, and in Whampoa Gardens, Hung Hom, 360 flats sold in two days. The units range from 624 sq ft to 1,002 sq ft and the average price was $HK1,138 per sq ft.
The continuing trend of low interest rates has meant that demand for sales across the board has been healthy, and the steady number of expatriates coming to the Territory should ensure a reasonable take-up of luxury residential apartments.
Building cost trends
Over the last quarter, construction costs have risen dramatically, and are expected to continue their upward movement over the next quarter, gradually levelling out.
The general cost trends of Hong Kong building prices rose by over 7% in the last three months of 1987 alone, surpassing the peaks of 1981.
The increases have been brought about by a continuation of chronic labour shortages within the industry and large increases in the costs of imported construction materials — particularly steel, which has risen in some cases by over 30%.
Large engineering projects such as the Second Cross Harbour Tunnel and the current construction boom throughout the territory has forced contractors to pay a premium for any available manpower. These increased expenses are already being passed down in the form of higher tender prices and thus will ultimately be reflected in higher sales prices of new developments in the long term.
