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Thursday, November 19, 2015, 08:59

Mainland ‘raids’ on HK offices to escalate

By Sophie He in Hong Kong

There seems to be no respite in the continued blitz on Hong Kong’s top-grade offices by mainland companies, many of which have already sunk their roots in the city.

Property experts expect mainland enterprises to intensify the spree by snapping up more prime office buildings in the SAR in the coming years amid a growing urge for them to invest overseas.

Yu Kam-hung, senior managing director of investment properties at CBRE Hong Kong, told China Daily he is aware that several mainland financial institutions, as well as listed companies, are keen to purchase office space in Hong Kong.

“These companies, usually, already have businesses in Hong Kong. More importantly, they want to set up their regional headquarters here to help them expand or invest in overseas markets,” he said.

On Nov 12, Guangzhou-based developer Evergrande Real Estate agreed to buy the 26-story Mass Mutual Tower in Wan Chai from Chinese Estates Holdings for HK$12.5 billion, or HK$36,200 per square foot, in what is said to be the most expensive office building transaction ever recorded in the SAR.

On the same day, the mainland’s largest insurer, China Life, said it had agreed to buy an office tower with a two-story retail space in Hung Hom from Wheelock & Co for HK$5.85 billion.

Yu said although the rental return on office buildings is about 1.5 to 2.5 percent, which is not high, mainland companies aim to set up their regional headquarters or expand their operations.

But, since the supply of Grade A office buildings in Hong Kong, especially in prime locations, is very tight, mainland enterprises will seize the opportunity whenever it arises, Yu added.

Vincent Cheung Kiu-cho, head of valuation advisory services for Greater China at property consultant DTZ/Cushman & Wakefield, told China Daily he expects the record for office-building transactions set by Evergrande to be broken in the coming years.

“Large mainland companies usually look for an entire office building with the right to rename it, especially in Central, Sheung Wan, Wan Chai and Admiralty. And, as the supply of top-grade office buildings in these areas is tight, we can expect to see new records being broken in office-building transactions,” Cheung said.

He believes that mainland companies will gradually move toward Kowloon East and Hung Hom, which offer a greater supply of office space.

Wendy Lau, executive director of office services at Colliers International, a property consultant firm, also predicts that mainland enterprises will soon start snapping up office buildings in Kowloon.

She is confident that, driven by the central government’s favorable policies to encourage mainland companies to “go overseas”, the transaction volume in the purchase of office buildings in Hong Kong by mainland businesses in 2016 will not be weaker than this year’s.

Investment banks, on the other hand, have warned that mainland enterprises are paying too much for Hong Kong office buildings.

In a report issued after Evergrande announced its purchase of Mass Mutual Tower, JPMorgan said the acquisition would not add value to the company, as the low yield of Mass Mutual Tower does not justify such a high price, while Evergrande is paying a significant premium to prevailing transactions.

Bank of America Merrill Lynch holds similar views, noting that the total rental income generated by Mass Mutual Tower last year was just HK$171 million. Based on Evergrande’s purchase price of HK$12.5 billion, the rental return would be only 1.4 percent.

The bank believes the return is too low and could turn out to be a financial burden for the Guangzhou builder.
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