Hong Kong Investors Gear Up for Value-Add Plays in 2018

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Antonio Wu Colliers International

Colliers International Hong Kong’s Antonio Wu expects mainland capital to drive more change in 2018

Buyers have put HK$406 billion ($52.1 billion) into Hong Kong’s property market during the first ten months of 2017, and according to a recent survey of professional investors focused on the Asian financial hub’s real estate sector by Colliers International, still bigger things are expected in 2018.

The rush to capitalise on Hong Kong’s property surge made the city the largest investment market in the world this year – surpassing New York – according to data from real estate information provider RCA. And with 68 percent of the major investors who responded to the survey indicating that they plan to allocate more of their assets into the property market in the next 12 months, the city’s property market is likely to become even more competitive.

The rush to ride the city’s surging property market is already stoking competition for assets, however, which is driving most investors to look for properties that can be renovated, repositioned or reconfigured to boost investment yields, according to the Hong Kong Investor Survey Report 2017 by Colliers.

Investors Encouraged by Record Prices

Colliers International2017 brought a number of new prices record in Hong Kong, including a new price record for the purchase of a commercial site in the city, when Henderson Land Development bought the Murray Road car park site in May. Then in October, CK Asset achieved a new high water mark for the sale of a commercial building when it sold the Center on Queen’s Road for HK$40.2 billion to a mainland-led consortium.

Despite these high prices, however, some 50 percent of the investors that Colliers surveyed projected themselves as net buyers of assets in the coming year, and 68 percent of respondents with a multi-asset portfolio indicated that they are likely to increase the share of real estate investment within their portfolios.

High Values Drive New Strategies

Colliers Survey ResultsWith investors determined to stay in the game in Hong Kong, rising asset prices are driving new levels of interest in value-add strategies. In search of investment-level returns, some 71 percent of investors interviewed indicated that they would be pursuing value-add approaches, as prices for scarce core assets compress yields to uncomfortable levels for many players.

“The market’s ascent means that traditional core strategies are facing compressing investment yields,” Colliers International’s Deputy Managing Director for Capital Markets and Investment Services in Asia Antonio Wu pointed out. “This creates opportunities for investors with effective value-add strategies to reposition assets to achieve more attractive yields.”

Those value-add strategies remain focused, however, on the city’s office market where average office rents have risen to world leading levels. “Of the 35 investors and developers that we surveyed, among those active in Hong Kong, 75 percent intended to invest in the city’s office market,” Colliers International’s director of research for Hong Kong and Southern China Daniel Shih pointed out. “So investors are looking for ways to more effectively re-use existing commercial buildings, or to convert other types of structures for office use.”

Long Term Trends Remain Favorable

Although the interest rates appear likely to rise in the near to medium term, the survey indicated that many investors have already priced in this eventuality and remain cautiously optimistic about the longer term prospects for the city and the region, thanks to the continuing inflow of mainland capital, significant improvements in regional infrastructure and a brightening outlook for the retail sector.

“We expect that Chinese capital will continue to push up both rental rates and asset prices for Hong Kong properties,” Wu said, “which will continue to create opportunities for investors.”

The city’s coming integration into the Greater Bay area is also boosting prospects. “The coming completion of the Hong Kong-Zhuhai-Macau bridge and other key infrastructure should benefit a broad array of property projects, with locations close to infrastructure upgrades, such as Kowloon West having the most encouraging prospects,” Shih added.

Even the city’s retail sector should see brighter days after a protracted slump. Colliers sees the industry as having reached bottom, and that it will continue to recover into 2018 and beyond as retail developers roll out new concepts and take advantage of improving technology.

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