Office Towers in Hong Kong Battered from All Directions: Big Haircuts for Investors amid Falling Rents and Rising Vacancies

As so often, this started well before Covid, but Covid is speeding up the process.

By Nick Corbishley, for WOLF STREET:

A case in point is the 73-storey Center office block. In late 2017, when Hong Kong’s multi-decade real estate boom was close to its vertiginous zenith, a consortium of business magnates called C.H.M.T Peaceful Development Asia Property bought 75% of the building from the city’s then-richest man Li Ka-shing for HK$40.2 billion (US$5.15 billion). According to real estate agents cited by South China Morning Post, it was the world’s most expensive transaction for a single building.

Each consortium member paid an average of HK$33,000 ($4,260) per square foot for their piece of the deal. The business plan was simple: rather than renting the office space, each member would divide the floors they owned into subdivided office units which they could then sell on to the occupants at a higher price, turning a tidy profit in the process. The plan rested on two basic assumptions:

  1. Many end-users would prefer to own their office in Central rather than pay the lofty rents;
  2. Prices for commercial real estate in Hong Kong would continue to soar, at least until the units had all been sold off.

For a while it seemed to work. In March 2019, one of the consortium members, Raymond Tsoi Chi-chung, sold the last subdivided unit on the 22nd floor for HK$35,000 ($4,520) per square foot — a 6% mark-up on the 2017 price. Two months later, another consortium member, David Chan Ping-chi, sold the 39th floor for the equivalent of HK$42,000 per square foot — 27% more than the average value paid by the consortium in 2017.

But then something strange happened: prices stopped rising, and then began falling, as the city’s real estate market was hit by the mother of all storms. First, Beijing imposed capital controls on money flowing out of China, much of which had been pouring into Hong Kong real estate. Trade tensions between the U.S and China then began escalating, leaving Hong Kong slap bang in the middle of the world’s two superpowers. Then the city was rocked by student protests, which recently met the immovable force of the Chinese Communist Party. And now, there’s the virus crisis.

In the second quarter this year, the volume of office real estate traded in Hong Kong collapsed by 95%, according to a report by Real Capital Analytics (RCA). That was more than any other major Asia-Pacific market analyzed by RCA.

Values of Class A office buildings in the city fell last year by 7%, the first fall since 2008, according to the commercial real estate services firm JLL; and with Covid-19 thrown into the mixer this year, prices have continued to decline.

That means that the members of the C.H.M.T Peaceful Development Asia Property are now having to sell at a loss. According to a report in Hong Kong’s Sing Tao Daily, Chan Ping-chi just sold his 70% stake in the building’s 42nd floor for HK$405 million ($52.6 million), which works out at an average floor price of HK$27,100 per square foot – 18% less than Chan paid in 2017 and 35% less than what he was able to charge for the 38th floor in May 2019.

The sale marks the lowest price paid for a piece of the Center since the consortium bought it three years ago.

Given that Chan and his cohort reportedly financed their purchase of the Center with bonds paying interest rates of over 15%, if prices stay this low for long or continue to fall, the financial pressures on the consortium could soon become unbearable.

Activity picked up slowly in July, but given the wide bid-ask gaps for office buildings, the number of transactions remained low. And the few transactions that did take place traded at sharp discounts. For example, in recent days a Hong Kong-listed mainland developer reportedly took a 30% haircut on an office investment in the New Territories.

Average office rents have also fallen for four consecutive quarters, lopping more than 23% off leasing rates since April of 2019, says JLL. In July they dropped by 0.9% city-wide compared to June, after having fallen by 13.2% through the first six months of 2020, JLL reported last month.

“Immediate leasing demand remains weak as occupiers hold off from making larger real estate decisions,” Alex Barnes, head of markets for Hong Kong at JLL said in a statement. “We expect to see more surrender space come to the market in the second half of the year as businesses realize internal occupancy strategies to save on overheads.”

By the end of June, the amount of space surrendered in Hong Kong during 2020 had already reached an 18-year high of 1.3 million square feet, according to JLL. Much of it was in the uber-expensive Central district, where the vacancy rate for grade A offices rose to 5.7%, up from 4% in February 2020 and 2.3% in July 2019. The overall vacancy rate for grade A offices in Hong Kong rose to 7.9% in July, the highest level since 2010.

Last month or two, Chinese investors appear to be coming back into the market, bolstered by the Chinese government’s recent pledge of support for Hong Kong’s status as an international financial hub. But it’s not been enough to turn the market around.

As tensions rise between the U.S. and China, some Western companies are not just downsizing their Hong Kong operations or relocating to a cheaper borough; they’re leaving Hong Kong altogether. On Wednesday, the world’s second largest asset management firm, Vanguard, announced it is exiting Hong Kong and relocating all of its China-focused operations to the mainland.

Nearly four out of ten members of the American Chamber of Commerce in Hong Kong said in a recent survey they are considering abandoning the city due to the national security law as well as Washington’s imposition of sanctions and the revocation of Hong Kong’s preferential trade status. The EU’s outgoing envoy to Hong Kong also recently warned that the city has lost some of its appeal as a business and financial hub.

This is what sets Hong Kong’s office market apart from those of many other global business hubs. While most office markets are having to grapple with the hugely disruptive forces being unleashed by the virus crisis, Hong Kong’s is facing disruption from just about every direction, including an escalating cold war between the world’s two superpowers. By Nick Corbishley, for WOLF STREET.

Most of the fallout from the Pandemic has been postponed in the UK. But then what? Read… Small Landlords, Tenants, Lenders, Governments Grapple with “Extend-and-Pretend Forevermore”

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  28 comments for “Office Towers in Hong Kong Battered from All Directions: Big Haircuts for Investors amid Falling Rents and Rising Vacancies

  1. The Bob who cried Wolf says:

    I think any investing in China is going to be a problem for a while to come. It’s not just the US that’s realizing their dependence on a communist regime didn’t go so well but, also, many other countries. It’s leading to another cold war. Covid merely hastened it is all.

    • Bobby Dents says:

      lol, your not getting it. Communist regime??? lol. Nope.

      Investing in the US is going to be a problem with all the debt to service.

  2. 2banana says:

    A condo conversion flip?

    Not really that original.

    “The business plan was simple: rather than renting the office space, each member would divide the floors they owned into subdivided office units which they could then sell on to the occupants at a higher price, turning a tidy profit in the process.”

    • Old School says:

      If you are paying $4000 per sq ft., what kind of revenue are you going to have to generate to make the numbers work? Seems like it must be in the $1000 – $2000 range.

  3. DR DOOM says:

    This may be the least of their issues when the Chinese finish with their “re-education”of HK.

    • NBay says:

      Actually, it probably wouldn’t be too hard to make a case for Covid-19 just speeding up what was going to happen here without it.

  4. gary says:

    “Vanguard, announced it is exiting Hong Kong and relocating all of its China-focused operations to the mainland.”

    Mainland China? So Vanguard is unhappy with CCP activity towards HK and they show this by moving into CPP mainland? Am I missing something?

    • Wolf Richter says:


      They no longer need to be in HK. China is the big market they’re after, not HK, and as HK gets more integrated into China, mainland Chinese have less reason to go to HK for investment purposes.

  5. Frank from Taipei says:

    I shed no tears for Hong Kong or their puppet masters in Beijing.

  6. A says:

    Between Trump and the communists, Hong Kong is being destroyed from all sides. A sad end to a proud city.

  7. AxxNox says:

    Hong Kong money is pouring into Canda and the western US. Everyone is in Self defense mode. 23% off leasing rates is terminal.

  8. MonkeyBusiness says:

    Not a China specific problem. I mean I wonder how many people here have been to Hong Kong or have Hong Kong friends.

    I wonder if the US has a billionaire that’s the equivalent of Lee Ka Shing. “Superman” they call him for his business acumen. Every day 10 cents of every dollar spent in Hong Kong flows through his businesses, from properties, ports, supermarkets, etc. And that’s just one billionaire. Hong Kong has more billionaires per capita than the US. People here can go to Youtube to see the effect of these billionaires on ordinary people. Even BEFORE the demo, people were already living in “cages”.

    Hong Kong is CAPITALISM at its finest, and serves as a great preview of what’s coming in the US where 50 cents of every dollar spent. would flow through FAANGS every day. “But it’s fine” most of the people here will say, “because we are a democratic country!!!”

    ROFL. I am not a fan of big governments, but when a few billionaires get to decide everything, aren’t they like the government?

    I pray for a day where every human being in the US gets employed in Amazon warehouses. What a glorious day it would be.

    • Vegas Vinnie says:

      Lee Ka Shing “only” had a net worth of just under $30B in June of 2019. I’m pretty sure he’s nowhere near Bezos who made more than that during just the last 5 months.

      • MonkeyBusiness says:

        Yeah, but Bezos’s is a global company. Lee Ka Shing owns some overseas companies but he’s always been predominantly a Hong Kong based player.

        And as I said: “10 cents of every dollar in HONG KONG flows through his coffers every day”. Not even Bezos can say that about America, his own home market.

        People overseas want to put every single HK problem on the feet of Beijing, but this riot is years in the making and is partly the fault of the British. The later invented the “hong” system and Lee Ka Shing basically grafted his way into that. But hei I am not surprised, the writer probably has not read too much of Hong Kong’s history.

    • Old School says:

      Actually, not much money flows through the Faangs. I think it’s around 1%. They just have hugely inflated market caps. It’s the zirp bubble. In 20 years probably only one or two of them will be much of anything. It’s the way of capitalism like GM, GE, Kodak, WorldCom. Most shareholders will be burned over the next decade, but maybe one will earn it’s price.

      • Old School says:

        I went back and checked and if you leave out Apple the FANG stocks are 0.5% of the revenue of SP500. Got to be in the top 10 bubbles of all time history.

        • MonkeyBusiness says:

          My statement about the FAANGS was hypothetical, but at the same time I can see that happening.

          Compare that 1% with what Lee Ka-Shing has going i.e. he controls 10 percent of Hong Kong’s economy.

          The concentration of power is just too overwhelming. His old right hand man, Canning Fok, used to spend every morning reading through every newspaper in Hong Kong and upon finding the slightest bit of criticism against Lee, he would call the offending newspapers and give their editors an earful.

  9. Dave says:

    Bottom line is China realized they don’t need the HK economic engine anymore. So HK preferences and separate systems are being eroded.

    HK will no longer command a premium over mainland China; as western governments no longer give them the economic preferences they once enjoyed.

  10. Someone says:

    Slight correction to your article. It was not student protests that affected real estate, it was the removal of basic human liberty and freedom from the people of Hong Kong by the totalitarian government of the PRC and the CCP.

    • Lee says:

      Yes, and the Chinese have arrested another Australian citizen – a newscaster this time:

      “In another huge shot across the bow in the ongoing tit-for-tat media and journalism ban between China and the West, a high-profile Australian television anchor has been detained by authorities in Beijing.

      Australian Foreign Minister Marise Payne confirmed Monday that Cheng Lei, who it turns out is a veteran news anchor for the Chinese government’s English news channel, CGTN, is being prevented from returning to her home country. She’s been detained and placed in secured isolation for an indeterminate amount of time.

      “The Australian Government has been informed that an Australian citizen, Ms Cheng Lei, has been detained in China,” the Australian government statement said. “Formal notification was received on 14th of August from Chinese authorities of her detention,” it continued, though news of her detention is only now being reported via Australia’s ABC.”

  11. Escierto says:

    I have visited Hong Kong twice and I loved the city. The Chinese leadership, like Trump and Putin, have no vision, only fear. Instead of making Hong Kong like the rest of China they should have worked on making the rest of China like Hong Kong.

    • char says:

      Corrupt to its core? Media can say anything they like except if it is about Fat Cats like Lee Ka-Shing. Only industry is speculation. I can see why we should be for China following HK footsteps but it is more because i want to see the Union as number 1 in the World and not China.

  12. Chris Oliver says:

    Good story. The only thing that has changed since the deal for The Center was signed is that Li Ka-shing has formally stepped down for retirement and let his son Victor take over day to day operations. It is likely that the sale of the Center signals the top of the market, and another good indicator by Li senior.

  13. Bobby Dents says:

    Commercial RE is busting globally. That was clearly a bubble and no access to liquidity. Its going to be a economic drain for awhile. There are just a sea of commercial RE that just is sitting and they weren’t making it before Covid, it was already starting.

    Why do you think Trump is going with these bogus trade wars??? Trying to keep China from making a run on the dollar, instead of opting for new reserve currency Putin and his red sea lackeys can have a piece of. If Trump loses, China will begin to hyper appreciate their currency, drawing in capital while the US gets squeezed. It will force companies like Apple to decide if they want to continue being a US company. I always thought Navarro was on the Chinese exporter welfare rolls, now it has been confirmed. They only have the “disrespect card” left to play to keep their currency down and they used it after China started its move in 2017.

    China thinks they can manage the world reserve currency better.

    • Lee says:

      Tin foil hat theories?

    • yewtaipan says:

      Do you know why China able to print more than 3 trillion Yuan a year for the past 5 years, without much inflation ? China has been printing more than 1 trillion Yuan every year since 2005, to stimulate the economy.

      China able to print such huge trillions of Yuan yearly, with minimum inflation, is because China have US$300-400 billion trade surplus with USA every year.

      In addition from 2000-2014, China have accumulated more than US$3.5 trillion in forex holdings overseas. This included US$1.3 trillion in US Treasury bonds making China the largest owner.

      Therefore trillions Yuan China printed yearly are actually supported by China trillions in forex holdings and billions in yearly trade surplus.
      This trillion Yuan printed every year, allow China to pay for all the expensive infrastructure, such as high speed railway network system, big dams, huge wind turbine farms, country wide telecom infrastructure, vast road network, south to north water transfer canal project,etc.
      Also China was using the trillion Yuan printed to subsidise exporters such as Huawei, ZTE, etc.

      China able to invest and build such giant infrastructure projects WITH NO NEED to depend on IMF, World Bank and foreigners investment. Don’t you think this is very amazing ?

      I have discuss this with very brilliant and knowledgeable economists in the internet forum, and they all did not believe my analysis and observation.
      But these so called brilliant academic also unable to explain why and where China get all the billions of Yuan or USD to build such advanced infrastructure for the past 10-15 years.

      So there are no secrets of China economic success. It is all due to trade surplus earned from USA, and printed trillions Yuan to invest in their huge infrastructure projects, and subsidise exporters, to ensure can continue to earn trade surplus with US.

      Americans consumers are the real suckers all along. None of them benefit from trade with China.

  14. Walter Ego says:

    “That means that the members of the C.H.M.T Peaceful Development Asia Property are now having to sell at a loss. According to a report in Hong Kong’s Sing Tao Daily, Chan Ping-chi just sold his 70% stake in the building’s 42nd floor for HK$405 million ($52.6 million), which works out at an average floor price of HK$27,100 per square foot – 18% less than Chan paid in 2017 and 35% less than what he was able to charge for the 38th floor in May 2019.”

    Your take is all wrong. The way I’m reading it the floor space for Hong Kong office condos in the absolute middle of the worst pandemic in 100 years is $3500 psf.

    Hardly a disaster in any language.

    The sky is not falling, as much as you want it to be so.

    • Wolf Richter says:

      Walter Ego,

      No one here said “the sky is falling.” Where did you read that? In our own imagination? What was said here is that prices are falling. Big difference. Do try to read more carefully before disagreeing with something no one said.

Comments are closed.