Investment volume in Hong Kong’s commercial real estate market fell by 10 percent year-on-year to $1.6 billion in the first quarter of 2023, with small and mid-sized private capital deals dominating as buyers shifted to retail properties, according to JLL.
Sales of retail assets made up 56 percent of investment volume in the Asian financial hub during the first three months of the year, said Oscar Chan, the property consultancy’s head of capital markets for Hong Kong.
“Investors have shifted their focus to retail properties as they expected the retail’s rents and capital value will rebound following mainland China’s reopening,” Chan said, adding that the hotel segment is also likely to benefit from a tourism recovery.
The Hong Kong update draws on JLL’s Capital Tracker report for the Asia Pacific region, where investment volume tumbled 30 percent year-on-year to $27 billion in the first quarter as most markets recorded fewer deals.
The burst of first-quarter retail deals in Hong Kong was led by Henderson Land’s Sunlight REIT, which in January acquired the West 9 Zone Kids children’s mall in Kowloon from local investor Francis Law for $95 million.
In March, China Overseas Land & Investment sold the retail podium at the One Kai Tak residential complex to an undisclosed buyer for $77 million, the report said. The disposal came after COLI announced last November that it would sell a 30 percent stake in a residential plot on the former Kai Tak airstrip to a 50:50 joint venture between units of its parent group, China State Construction and Engineering Corp, and a subsidiary of China Construction Bank Corporation for $173 million.
Hong Kong’s sole office deal tracked by JLL in the first quarter was New World Development’s sale of the KOHO commercial building to an undisclosed buyer for $217 million. The company controlled by the billionaire Cheng family had sought $390 million for the property as recently as 2020, according to a Mingtiandi report.
Elsewhere in the region, Japan outperformed key markets with a 4.7 percent year-on-year rise to $8.9 billion in first-quarter investment activity, boosted by Odakyu Electric Railway’s sale of its Odakyu Dai-ichi Seimei office building to Dai-ichi Life for $536 million.
Towards the end of the quarter, Odakyu agreed to sell the Hyatt Regency Tokyo to a joint venture of KKR and Gaw Capital for a yet-to-be-disclosed price. Another overseas investor, BentallGreenOak, scooped up the Rihga Royal Hotel Osaka for $415 million, seizing on Japan’s weak currency and low borrowing costs.
“Since the new Bank of Japan governor suggested that the central bank was to continue with the current ultra-low quantitative easing monetary policy, Japan is the only major property market in the world where positive leverage yield spread can be achieved,” JLL said.
APAC office investment fell more than 26 percent year-on-year to $12.7 billion in the January-to-March period, marking one of the sector’s softest quarters on record. Large pockets of the region saw fewer office trades as interest rate headwinds and asset repricing slowed activity, according to JLL.
Office deals of $300 million or more nearly evaporated, with asset managers struggling to secure funds and bearish outlooks in the North American and European markets beginning to seep into Asia.
While APAC is lagging behind in the current adjustment cycle, JLL doesn’t anticipate a material correction in price levels, said Pamela Ambler, head of investor intelligence for Asia Pacific at the consultancy.
“We expect the level of repricing to peak in the second quarter of 2023 and then moderate in the latter half of this year as borrowing costs are expected to come off with potential rate cuts going forward,” Ambler said.