Hong Kong is missing out on Asia-Pacific office property boom as supply glut puts off investors: Colliers

First-quarter investment in the city’s office space was a fraction of that in mainland China, South Korea and Japan
High vacancy rates are weighing on rents, which fell 2.7 per cent in the first three months of the year, according to JLL

Hong Kong property

Cheryl Arcibal

Published: 8:00am, 15 May 2024

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Hong Kong is missing out on an office investment boom in the Asia-Pacific region this year as a supply glut and high vacancy rates put investors off the segment, according to analysts.

In the first three months of the year, investment in office space in Hong Kong amounted to HK$242 million (US$31 million) in the form of two deals, according to Colliers.

The entire Asia-Pacific region received US$11.5 billion of investment in office property in the quarter, with Japan, South Korea, China, Taiwan and Australia taking the largest shares, the property consultancy said.

Japan saw 50 deals worth about US$4.4 billion, while South Korea saw 31 office properties change hands for US$2.75 billion. In mainland China, investment came to US$1.8 billion via 23 deals, while Taiwan recorded US$800 million of transactions followed by Australia’s US$497 million, according to the data compiled by Colliers.

“I don’t think the office sector in Hong Kong will pick up very quickly [as there is a] high vacancy rate and there will also be more supply coming up in the next few years,” said Thomas Chak, co-head of capital markets and investment services at Colliers Hong Kong, during a webinar discussing the state of investment in the region’s property market.

Vacancy estimates vary considerably among property agencies but all point to an office real estate segment that is doing poorly.

For example, Colliers said the vacancy rate in Hong Kong’s prime office space hit a record of 15.1 per cent towards the end of August last year. Knight Frank, meanwhile, said it peaked at 12.2 per cent in March this year.

JLL said that since late 2022 the office market has experienced one of its longest streaks of double-digit vacancy rates, as tenants give up space and new buildings bolster supply.

The high vacancy rates are weighing on rents, which fell 2.7 per cent in the first three months of the year compared with the preceding quarter, according to JLL.

“If we compare to the peak in 2018, we are now seeing a 40 per cent to 60 per cent drop in capital value in grade A offices, and that is quite a significant drop,” Chak said.

“In fact, we just witnessed a transaction of an office unit in a famous building in Central, which has sold at just 60 per cent of its value from its peak in 2018. And I think there will be more pressure coming.”

CBRE estimated in 2022 that additional office space of 8.2 million square feet would come on stream by this year as new buildings such as Two Taikoo Place, The Henderson and the Cheung Kong Center II came to completion.

While the office sector is unlikely to see a quick recovery any time soon, some of Hong Kong’s other property segments such as retail and hospitality are primed to attract more capital this year, according to Chak.

“There are lots of other opportunities in Hong Kong, especially in retail, in the accommodation sector such as student accommodation and hotels,” he said. “We are seeing more capital coming in, especially from Singapore, from Malaysia and from [mainland] China looking for these types of opportunities.”