1H/2017 – Revaluation of Office Floors and Hotels Making a Come Back
Jonathan Chau , Senior Director (Investment Division)
Dear Friends, Prestigious Clients,
Over the past several months, conversations I’ve had with various people in the industry have always revolved a similar topic.
“Who is buying in this market? How do they justify their returns and under-write a sizable profit a few years down the line?”
The veteran local investors would say:
“Too expensive la, the market will correct in 12-18 months, I’m sure of it!”
Even us as brokers are usually pessimistic doing our projections for the following year. My Boss Raymond Lee almost always tells our UK board that the next year will almost surely be a correction and we will expect our revenues to be halved. He’s said this since 2013!
Through these discussions with the many wise people in the industry, ranging from family offices to institutions to industrialists that have seen HK’s various cycles, we’ve all come up with the following thoughts:
- Everyone has too much money; banks want to do loans, families have too much excess cash, institutions are looking to diversify their investments, it needs to go somewhere;
- The Government and HKMA have tried their very best to curb property investment and cool down the market. Pretty sure that’s not working… *touch wood*;
- A significant interest rate hike has been talked about for so many years that we’ve all forgotten how many years it has actually been;
- Those that thought 2013 was the top of the market and stood firm on waiting for the correction have sadly seen many of their peers make a lot of money over the past 4 years;
- Did I mention that the market has too much capital?
Realistically if a correction does happen, how many % can it drop? I’m putting my money on 15%, maybe 20% MAX before everyone and their mothers flood the market again. Please take a look at the chart below:
Every cycle is shorter than the previous cycle for a reason. After 1997 and the SARS outbreak, EVERYONE is prepared and have reserved plenty of capital for investment on the rebound. No one wants to miss out anymore after seeing all their neighbours make laughable multiples on their investment when they bought during the crises.
At the end of the day, should the market “tank” 20% tomorrow, our pricing levels will be back to…. 2014!!! Doesn’t this put everything back to perspective?
Review of 1H/2017, Revaluation of Strata-Offices:
Remember my note in December where I mentioned strata-titled offices were outperforming every other sector. Well thanks to the Murray Road Car-Park, the entire sector revalued itself prior to the tender. We saw record-highs in nearly every strata office towers in Admiralty, Central, and Sheung Wan. Here are some of the major Whole Floor transactions (for reference only):
|Property||Gross Area (approx.)||Price (HK$)||Unit Price (approx. HK$psf)|
|11/F World Wide House||16,693 sq.ft.||$601,000,000||$36,003|
|41/F Lippo Center Twr 1||14,104 sq.ft.||$472,000,000||$33,700|
|34/F COSCO Tower||20,506 sq.ft.||$630,000,000||$30,722|
|13/F Bank of America Tower||13,880 sq.ft.||$465,000,000||$33,500|
|3/F Far East Finance Centre||10,800 sq.ft.||$297,000,000||$27,500|
|15/F Admiralty Centre Twr 2||10,627 sq.ft.||$318,000,000||$29,923|
|79/F The Center||13,213 sq.ft.||$536,000,000||$40,566|
And for the Top 5 office transactions of all time (which all transacted within the past 7 months):
|Property||Gross Area (approx.)||Price (HK$)||Unit Price (approx. HK$psf)||Date of Transaction|
|79/F The Center||13,213 sq.ft.||$536,000,000||$40,566||Jan-2017|
|1401-02, 9 Queen’s Road C||3,664 sq.ft.||$145,827,200||$39,800||Mar-2017|
|2303, Far East Finance Centre||1,308 sq.ft.||$50,000,000||$38,226||Dec-2016|
|4701, Far East Finance Centre||2,750 sq.ft.||$100,375,000||$36,500||Mar-2017|
|11/F World Wide House||16,693 sq.ft.||$601,000,000||$36,003||Jun-2017|
I personally feel that the Kowloon Strata Market seems to be a bit of a laggard and maybe there will be some value there. I’ve always said that for medium to long term investments, Kowloon East is the way to go. Those Exchange Tower floors that we were marketing at $13,000psf previously doesn’t look that expensive after seeing those prices listed above now does it?
Notable En-Bloc Transactions (for reference only) during 1H/2017:
- J Plus Hotel & 14 Pennington Street, Causeway Bay: Sold for a Total of ~$1,700,000,000 @$20,920AV
- Newton Place Hotel, Kwun Tong: Sold for $2,300,000,000 @$9,516psf on GFA (for me, the one that got away….)
- Newton Inn, North Point: Sold for $1,100,000,000 @$7,674psf (we won’t see something this inexpensive on HK Island for a while)
- 18 Junction Road, Kowloon City: Sold for $1,300,000,000 @$14,794psf on GFA (great deal)
- The Bay Bridge, Ting Kau: Sold for $1,680,000,000 @$7,766psf
- 11-15 On Lan Street: Sold for $777,000,000 @$23,993AV
- Kwun Tong View, Kwun Tong: Sold for $1,990,000,000 @$15,846psf on GFA @ 3.16% yield (great deal)
- 1-9 Shouson Hill Road East: $1,530,000,000 @$51,078psf (on existing saleable area)
For further details, please let us know as the team is currently updating the Transaction Files you received last time.
Hotels… is it finally coming back?
A flurry of hotel transactions dominated the market the first few months of the year, with a total of 8 hotels/serviced apartments (excluding J Plus, which we believe will be redeveloped) having sold at a combined price of approx.. $7,550,000,000 which also includes the Butterfly on Hollywood transaction which I predicted (note attached) would be sold this year (along with Kai Kwong Commercial Building for those keeping tabs).
Speaking with operators and owners, their feeling is that the worse have already passed and business have begun to pick up early this year with some hotels seeing a 5-10% growth over the first 6 months. The larger hotels were mostly purchased by owner/operators, showing confidence that this sector is back in business for the long run. Smaller hotel assets are being value-added in a variety of ways, with many looking to do a rebranding of the existing asset or exploring a co-living concept that seems to make sense especially in HK’s expensive residential market.
It’s also interesting to note that other than Price per Key (which is obviously an important factor), many purchasers are cautious of Unit Price as well. While many hotel owners have revalued their assets after these transactions accordingly, off the top of my head I don’t believe there have been any transactions above HK$16,000psf on the GFA. Purchasers are not ready to pay a premium for a hotel product which tends to be much more labor intensive and less liquid than their commercial counterparts. It will be interesting to see what happens in the 2H of 2017 when a few more hotel assets come online for sale.
My (JC’s) Picks For Q2/2017 (subject to contract):
While there are a bunch of assets that will be publicly marketed in the next few months, a few that I would focus on include:
- L Plaza, 367-375 Queen’s Road Central, Sheung Wan
- When AEW sold Continental Place to a Mainland Buyer at $30,000psf+, this became a very interesting deal
- Should be the least expensive en-bloc commercial building available in Central + Sheung Wan
- Plans approved for bubble lift to increase retail value for the podium floors
- Indicative Price: $950,000,000 (~$16,300psf)
- Turn-Key Hotel, 10-12 Yat Fu Lane, Western
- It’s not on a busy street, but ideal for student housing or student hostels
- 50 rooms, walking distance to HKU
- Completion is estimated to be end of Q4/2017
- Can Try Price: $240,000,000 @$13,275psf on the GFA
- Lancashire Centre, 361 Shaukeiwan Road, Island East
- Asking only around $12,300psf on HK Island, I can’t find a cheaper building by unit price along MTR line on HK Island
- Sizeable asset at 81,000 sq.ft., on tenant reconfiguration may achieve close to 4% yield
- Indicative Price $1,000,000,000 @$12,288psf, but I feel the Vendor may consider something lower than this price, can call me to discuss.
- Maxwell Industrial Building, Kowloon East
- Those that have known me for a while understand that I am absolutely enamored with this site
- Class C site, approx.. 19,180 sq.ft., across from the Ngau Tau Kok MTR station
- It’s got various things that appeal to various types of buyers: 1) Can be a land bank, 2) Can be developed into ‘high-end industrial’, 3) Can pay premium to do a retail complex (because honestly, lack of retail supply in the immediate vicinity)
- Indicative Price: $2,000,000,000 @$8,670AV
It’s going to be a very busy summer at Savills; as a company we have been appointed to do over $25 Billion worth of assets and thus you will be receiving many more emails and phone calls from us (on these and other very good off-market deals) over the next several months. Please don’t hesitate to contact myself or our team for further information.