Savills research showed capital value rises across the board in Q2 2015, with the exception of prime street shops, which recorded a 2.5% decline. Luxury apartments in particular posted a spectacular performance as values increased by 6.2% on the back of buoyant stock markets in both Hong Kong and mainland China.
“We doubt this rate of growth will be repeated in the second half, however, given recent uncertainties,” says Simon Smith, Savills’ Asia Pacific head of research and consultancy.
Deal volumes have been steady this year, with around 100 deals above HK$500m ($64.5m) each quarter.
Looking across the sectors, Smith says Savills is “more positive on the outlook for offices and residential, where limited supply and a fresh wave of demand related to the new Stock Connect schemes [which link Hong Kong’s stock exchange with major mainland exchanges] seems to have reinvigorated these two sectors.”
With the exception of land sales, Hong Kong has not seen many substantial deals this year (see table). An exception was the $938m acquisition of the Intercontinental Hotel in Kowloon by a Gaw Capital Partners- advised consortium (see box).
Pamfleet invests second fund
Boutique fund manager Pamfleet has been a long-term investor in Hong Kong and is now looking to invest capital from its second fund, having secured six deals and good returns from a number of value-added deals in Fund I.
Managing director Allan Lee believes there are more opportunities on offer for Fund II, although the focus may be different.
“There seems to be more available in the market today,” he says. “Twelve to 24 months ago, we were seeing perhaps one or two deals a week, but now we are seeing a deal almost every day and more sellers in the market. When we were investing Fund I, we saw a definite bid/ask spread, but now, as we are looking to invest Fund II, people seem more realistic.”
Hong Kong’s office market has been booming this year, but the same cannot be said for the luxury retail market, which is coming off a strong run of rental growth, as shoppers from China are coming less often and spending less.
Tony Lo, head of acquisitions at Gaw Capital Partners, says: “The office sector looks best compared with others, as rents are rising and demand from mainland Chinese financial services businesses is strong and growing. The core districts of Central, Admiralty and Wanchai look strong, as does CBD2 in Kowloon East.”
Lee adds: “With regard to office locations we favour West Kowloon, which has great infrastructure but has been a bit neglected compared with East Kowloon. On Hong Kong Island it is hard to find any whole buildings for sale. For Fund I, we made six investments in Hong Kong and only one was on Hong Kong Island.”
However, Lee notes that the popularity of the office sector and the sheer lack of supply means that there may be more value in less- loved sectors.
“The office sector is our bread and butter but it is hard to find value,” he says. “Out of 10 deals I like the look of, probably only one is offices. We are looking at opportunities in the retail sector, not high-end or high-street shops, but neighbourhood malls.
Malls have potential to add value
“This sector has been neglected but there is always lots of value you can add and it is a defensive sector – people will always buy the essentials. The crucial thing for these malls is that they have the right offering; if you can improve that you can add value right away without too much physical alterations.”
Falling luxury retail rents mean that there may be a counter-cyclical opportunity there at some point. While sales of watches, jewellery and designer labels have fallen in Hong Kong, it is still a massive market for luxury goods – the biggest market for Swiss watches in the world, surpassing even the US and China.
However, Lo believes it is better to observe the trend for the time being. “Luxury retail rents have been falling, but this has not really fed through to values yet; we are yet to see genuine sellers. It’s still too early to come to a conclusion.”
The city’s local players are notably savvy and a long-term complaint from institutional investors that like Hong Kong’s macro picture is that not only are the locals more nimble, but they are always speculators and traders. This can mean that they price assets very differently from an institution.
Investment by overseas players is not impossible, of course; a number of international institutions, such as Morgan Stanley Real Estate, CLSA Capital, LaSalle Investment Management, Grosvenor and AEW, have found success in the market in the past, while both Gaw Capital and Pamfleet have successfully invested institutional capital.
A more institutional market
However, Lee says things are changing somewhat: “Hong Kong investors seem to have become more institutional and more focused on longer-term income. Five years ago everyone talked about price per square foot; now they want to know about the yield.”
With recent stock market instability imported from China and ongoing concerns about how Hong Kong will fare as China’s growth slows, the city might seem to have more troubled long-term prospects.
However, Lo says: “In the longer term, the growth of China, which is even now at 7% per year, and the sheer size of China – 110m people in the neighbouring province of Guangdong alone – will support Hong Kong’s real estate market.”
GAW BELIEVES BIG HOTEL DEAL WILL CHECK IN A HEFTY PROFIT
Last month, Gaw Capital Partners sealed the biggest Hong Kong deal of the year, the acquisition of the InterContinental Hong Kong Hotel in Tsim Sha Tsui from the hotel’s current owner and management company, InterContinental Hotels Group.
Gaw advised a group of separate account investors and Hong Kong-listed Pioneer Global Group in the HK$7.27bn ($937.8m) deal, priced at $1.87m per key for the harbour-facing hotel. Gaw and its investors plan to spend $250m refurbishing the hotel.
With tourism from China slowing, the deal looks risky, but Tony Lo, Gaw Capital’s head of acquisitions, says: “The Intercontinental Hotel offered a very good entry yield, 5%, which is very high for Hong Kong.
“While the price per key was high, the hotel generates 50% of its total income from food and beverage outlets. Additionally, the average daily rate is somewhat lower than that of comparable hotels, so we hope that the renovation will allow us to catch up.”
Gaw Capital Partners will retain InterContinental Hotels Group to continue managing the property, whilst using its existing hospitality business, GCP Hospitality, to enhance the asset management.
GCP Hospitality’s portfolio comprises 18 properties in Asia and the US, and includes flagship Hotel G properties in Bangkok, Pattaya, Hong Kong, San Francisco, Suzhou, Shenzhen and Beijing, as well as the legendary Strand Hotel and Strand Cruise in Yangon, and management of the soon-to-be- opened Roosevelt Macau.
Hotels have not always been successful for real estate investors, with notable failures all over the world.
Lo says: “The operational business of hotels and the fluctuations in income can put off real estate investors, but the industry is growing in the long run and despite the recent slowdown in visitors from the mainland, Hong Kong still receives 60m visitors a year.”
The strong initial yield and prospect of boosting the average daily rate through refurbishment means the investment should “turn a handsome profit”, says Lo.
Published: 11 August 2015
By: Asia Property