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Wednesday July 28, 3:53 PM
HK office rents up with high-end units in hot demand
By Tara Joseph

HONG KONG, July 28 (Reuters) - The 52nd floor entrance to UBS's Hong Kong office looks more like a spa than an investment bank, with a ceiling-to-floor waterfall trickling next to the elevator in a quiet, minimalist corridor. Spanning seven floors in the year-old IFC2, Hong Kong's tallest skyscraper, UBS's office -- a modern, central space -- is becoming an increasingly rare commodity as the city's economy roars back to life.

"There's no new supply coming. If you want 20,000 square feet, where do you go?" said Simon Smith, head of research at real estate brokerage FPDSavills.

Office rents in Hong Kong's Central district are rising sharply this year, with prime locations in hot demand as finance and trading houses seek new space amid the territory's increased trade and economic cooperation with China.

Many firms also took advantage of sweetened deals late last year and relocated to bigger, plusher offices when the property market was still mired in a six-year slump.

Rents in IFC now average HK$40 per square foot (US$5.12) per month, according to agents, up from the bargain price of HK$18 just over a year ago when the SARS virus crippled demand.

Banks such as UBS are looking for ample room to house large trading floors with an array of sophisticated technical equipment and large, luxurious conference rooms to woo clients.

Last year, Hong Kong's largest Central district landlord Hongkong Land , which houses high-end clients such as investment bank Morgan Stanley , had a vacancy rate of 16 percent. That rate is now below seven percent and agents say its properties look set to be fully occupied by year end.

SUPPLY CRUNCH

FPDSavills' Smith said a supply crunch looms for both retail and office space in Central.

With IFC2 now 90 percent leased, the only new space coming onto the market in Central is Swire Pacific's Pacific Place 3 and the AIG Tower being developed by Lai Sun Development Co. Ltd. , Singapore's CapitaLand Ltd. and giant insurer American International Group .

Hong Kong now ranks as the 24th most expensive place to rent office space in the world, up from 31st place six months ago, a recent survey by real estate firm CB Richard Ellis found.

The firm said average annual rents were US$48.39 per square foot a year, up from US$42.37 per square foot six months ago.

That's still cheap compared with central Tokyo, Asia's most expensive city for office space, where rents average US$116.23 per square foot per year.

But investment bank J.P. Morgan expects Central office rents to rise 40 percent this year and a further 20-25 percent in 2005 on strong demand. The bank is even more upbeat on the shares of property firms with a mix of office and retail space such as Wharf Holdings , Great Eagle Holdings Ltd. and Hang Lung Group .

Shares in office-focused property firms have far outperformed those of residential giants such as Sun Hung Kai Properties in the past few months.

"The office market looks good, but the retail market also looks good," said J.P. Morgan property analyst Douglas Sung.

For a related story on rising residential rents double click on story number .
 

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AUGUST 9, 2004

INTERNATIONAL -- FINANCE

It's An Office Party In Hong Kong
Amid a strong recovery, commercial real estate rents and sales are rising fast


It's not much to look at. The cramped snack stand sells curried fish balls and squid skewers on a busy corner of Hong Kong's popular Mong Kok shopping district. But in June, ownership of the stand's 11.6 square meters changed hands for an eye-popping $4 million. That's $347,550 per square meter, the highest price ever paid for retail space in Hong Kong. Why? The stand's current rent of $15,400 a month could go up 25% next year as mainland tourists flood the area, according to Midland Realty Group, which brokered the sale.

The squid stand may be a special case, but its price is a sign that the dam has broken: Purchase prices and rents for commercial real estate in Hong Kong are on the way up after falling for seven years. With Hong Kong's economy showing signs of a robust recovery, prices for so-called grade-A office space throughout Hong Kong -- top quality and, usually, top location -- are up more than 70% from their SARS-induced lows of May, 2003. Corporate tenants are upgrading -- moving from outlying locations into the downtown financial district, known as Central -- and are confident enough in Hong Kong's future growth to pay lofty prices.

Rents look likely to follow suit. Jones Lang LaSalle, the international real estate broker, predicts Hong Kong office rents will rise 10% to 15% by yearend. Colliers International Property Consultants Inc. forecasts a jump of 20% in grade-A rents through July, 2005. Store rents are also rising as sales soar in ritzy shopping districts. The property rebound reflects broader economic growth. After years of stagnation and deflation, Hong Kong's gross domestic product surged 6.8% in the first quarter and is expected to tally at least 6% for the year. One important factor: the flow of Chinese tourists into Hong Kong since the mainland loosened travel rules.

The real estate revival has been a long time coming. Property prices and rents in Hong Kong peaked shortly after the former British colony was returned to Beijing's rule in July, 1997. The Asian financial crisis ravaged the region from late 1997 through 2000. SARS -- Severe Acute Respiratory Syndrome -- followed last year, devastating tourism. All told, property prices dropped two-thirds from 1997 to 2003.

DUSTING OFF OLD PLANS
One symbol of the turnaround is a Central office tower called Two International Finance Center. Two IFC and its partner, One IFC, together form Hong Kong's tallest, most prestigious office complex. But Two IFC's 140,000 sq. meters of office space exerted enormous downward pressure on rents when agents started marketing it last year. Today the first tower is almost fully rented, and Two IFC is filling fast. Among the tenants are banking giant UBS, which moved from Exchange Square, an older complex in Central, and Ernst & Young International, which is consolidating its offices around Hong Kong.

Now developers are dusting off plans that had been shelved for years. Swire Properties Ltd., a leading Hong Kong landlord and developer, has started clearing ground for a planned 144,000-sq.-meter office tower that had been on hold since 1997. Swire's 46,500-sq.-meter Three Pacific Place is expected to be finished later this year.

Is a new bubble swelling? Skeptics worry about the effect of rising interest rates and a cooling mainland economy. Analysts are confident, though, that high-end property prices will continue to rise at least through 2005. Others argue that any exuberance remains largely confined to the top of the sector, and won't develop into full-blown property mania. "At the secondhand and lower end, prices are not going up," says Kelvin Lau, regional economist at Standard Chartered Bank. Good growth, no crash: That's the hope. Nigel Smith, executive director for office services at real estate brokerage CB Richard Ellis, says: "Hong Kong is becoming more of a mature market with less volatility." Except, of course, when a location has a lock on the market for squid skewers.


By Simon Cartledge in Hong Kong

Copyright 2000-2004, by The McGraw-Hill Companies Inc. All rights reserved.
 

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Now developers are dusting off plans that had been shelved for years. Swire Properties Ltd., a leading Hong Kong landlord and developer, has started clearing ground for a planned 144,000-sq.-meter office tower that had been on hold since 1997.

are they talking about the 280m tower in island east??? or another tower??
 

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Hongkong Land books US$783m
Dennis Eng, HK Standard

A 15 per cent rise in the value of investment properties held by Hongkong Land in the first six months beefed up the accounts of the biggest commercial landlord in Central by US$810.1 million (HK$6.32 billion), resulting in an interim net profit of US$783 million.

The company's first-half results in 2003 were a loss of US$773 million, although, stripping out the property revaluations, the bottom line actually improved by about one-quarter to US$104 million. Hongkong Land follows International Financial Reporting Standards, which require property revaluations to be taken to the profit-loss account.

Chief executive Nicholas Sallnow-Smith pointed to a gradual recovery in the Hong Kong office market amid firming rents and the limited supply of Grade A office space in the Central area in the near term. According to market estimates, International Finance Centre (IFC) Two is about 90 per cent let while the only other comparable space available soon are Swire Properties' Pacific Place 3 and the AIG Tower, which is jointly developed by Lai Sun Development, Singapore's CapitaLand and insurance giant American International Group.

"We need properties like the AIG Tower and Pacific Place 3 to accommodate demand for office space but we don't want so much supply as to depress rents,'' Sallnow-Smith said.

Despite the improvement in the market, Hongkong Land's rental income dipped to US$144.6 million in the first half from US$154 million a year ago. Multi-year leases signed by tenants mean that higher rents in the market do not necessarily immediately benefit the company, Sallnow-Smith explained.

Property sales contributed revenue for the first time, generating US$22.4 million. Hongkong Land sold its residential property portfolio in the 1980s but has recently returned to the market as an active player. According to Sallnow-Smith, the company sold eight houses at its Stanley Court development in the first half. Another five houses remain unsold.

As the company only books such income when it passes the title deed to the buyer, Hongkong Land could not recognise revenue from sales of the first phase of Central Park in Beijing and Ivy on Belcher's in Hong Kong.

"We sold all of phase one of Central Park but, since it is not yet completed, we could not pass the title deed in 2003. With Ivy on Belcher's, almost 80 per cent of the units are pre-sold but we could not book any of the profits as we just got the occupancy permit in July and we can't hand the units over until August, so we'll book the profits in the second half,'' he said.

The four-phase Central Park joint venture development consists of 570 units in the first phase and about 370 units in the second. Sallnow-Smith said phase two profits will definitely be booked in 2005.

The company also has a site on Victoria Road, which will be ready for development by the end of next year. Hongkong Land has agreed to the basic terms with the Lands Department and is negotiating the premium payable, he said.

Growth next year is expected to come from the unveiling in the third quarter of 2005 of The Landmark Mandarin Oriental, a 114-room boutique hotel the company is developing in The Landmark retail and commercial property in Central.

The works will result in a net addition of about 120,000 square feet of space. The company also recently signed an agreement with Louis Vuitton to expand its flagship store at The Landmark to three levels from two.

4 August 2004 / 02:08 AM
 

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Tuesday August 10, 1:14 PM
Retail revival grips Hong Kong, making space scarce
By Tara Joseph

HONG KONG, Aug 10 (Reuters) - Lo Ka Shui, managing director of mid-tier Hong Kong developer Great Eagle Holdings Ltd., is feeling fortunate.

After a 15-year ordeal clearing a maze of densely populated city blocks in the Mongkok district, Great Eagle will open a HK$10.5 billion (US$1.35 billion) shopping mall this autumn in the thick of a Hong Kong retail revival.

"We're very lucky. It's good timing," said Lo, who trained as a cardiologist. "We will be almost 100 percent leased for sure."

A little over a year ago, Hong Kong malls were like ghost towns, devastated by the SARS outbreak. Now, shoppers are back in force and retailers are having a tough time finding space.

A local economic recovery has been boosted by the influx of tourists from mainland China, who visit largely to shop and dine. Overall, tourists account for about 40 percent of retail spending in Hong Kong, where there is no sales tax.

Many locals were stunned by reports that a Mongkok juice shop measuring just 125 square feet (11.6 sq metres) sold for HK$31.5 million ($4 million). Retail rents are up 20 percent this year.

"Some of the local players with a local customer base may be forced out of the market by players with a large international image," said Simon Smith, analyst at property brokers FPDSavills.

International retailers such as Richemont Group's Cartier recently opened new Hong Kong flagships featuring private viewing rooms and items from diamond necklaces to designer pens.

"We're worried. Some neighbourhood restaurants may have to close down because rents are going up by more than the price of food," said one small food store operator.

Big shopping centres such as Swire Pacific's Pacific Place and Festival Walk malls have waiting lists of prospective tenants, while Hongkong Land expects luxury handbags to fly off the shelves in 2005 and is in the midst of a US$210 million renovation of its Landmark mall.

Dickson Concepts (International) plans to open a Harvey Nichols department store in the same mall late next year.

"It's not only visitors and mainland turnover. Local market buying has also been an important factor," said Nicholas Sallnow-Smith, chief executive of Hongkong Land.

Hong Kongers, for whom shopping has long been a favoured pastime, are feeling more flush these days as the city climbs out of a six-year economic downturn.

Mainland tourist money is spent mainly on gold, cosmetics and electronics. The spending boom is expected to peak when more mainland tourists carry credits cards, which remain a rarity.

"Hong Kong is a fashion leader for a lot of mainland Chinese people," said Great Eagle's Lo.

Great Eagle's shares have jumped 60 percent so far in 2004 against a 1.2 percent drop in the benchmark Hang Seng Index . Swire Pacific has risen 10 percent, while Singapore-listed Hongkong Land has gained 13.5 percent.

GLEAMING NEW MALLS

Developers are rushing to catch up with the retail boom.

Great Eagle's 16-story Langham Place is only one of several gleaming new shopping centres in the city of seven million.

The ifc mall, owned by Henderson Land Development and Sun Hung Kai Properties , boasts 800,000 sq ft at the base of the city's tallest skyscraper and is almost fully leased after opening with just seven tenants in the depths of the SARS outbreak.

"Hong Kong people are inherently shopaholics," said Lawrence Wu, general manager of leasing for the mall.

Hysan Development Co. Ltd. has just finished a refurbishment of a high-end shopping plaza in Causeway Bay, an area which boasts the third highest retail rents in the world.

Estate agents say a shortage of prime retail space persists. The next big shopping centre under construction, the Union Square project to be built in West Kowloon by subway operator MTR Corp. Ltd. , is not due to open for another four years.

For brokers, the new retail frontier is cheaper residential areas attracting "big box"-style western chains.

Swedish home furnishings retailer IKEA, in partnership with the Dairy Farm Group , last week opened a new 85,000 sq ft outlet in Kowloon, its fourth in Hong Kong.

Brokers say British home improvement store B&Q, a unit of Kingfisher Plc. , is also in talks to lease space.

Smith of FPDSavills said he expects a further widening in the gap between rents in prime locations and less desirable areas, and that Hong Kong can absorb even more retail development. The city's outer suburbs have comparatively few shopping options.

"In some ways we are under-malled," Smith said.
 

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Causeway Bay rents lead Asia
Eli Lau, Hong Kong Standard
28 October 2004 / 02:00 AM

Causeway Bay has again been ranked the most expensive retail location in Asia, with high rents sustained by the influx of mainland tourists and improved consumer confidence, according to a global survey.

Retail rents in Causeway Bay ranked third highest in the world, following New York's Fifth Avenue and Paris' Avenue des Champs Elysees, real estate consultant Cushman & Wake-field Healey & Baker said.

Leasing a shop in Causeway Bay costs an average US$569 (HK$4,438) per square foot a year, compared to US$950 psf at shops between 50th and 59th Streets in New York City's Fifth Avenue, which ranked No1, Cushman & Wakefield's 2004 annual survey said.

"Improvements in consumer confidence and strong recovery in the tourism industry have been the main drivers behind the sharp rental growth in Hong Kong since the Sars epidemic last year," the firm's Asia research director John Su said.

Retail rents in Causeway Bay have increased 54 per cent as visa requirements for mainland tourists have been relaxed, benefiting the retail sector.

The survey tracks retail rents in the world's top 229 shopping locations in 45 countries.

"Most countries in the region have experienced solid economic recovery over the past 12 months and many international retailers have reacted quickly to expand their presence in places like Hong Kong, Japan and Singapore," Su said.

Cushman & Wakefield's head of research David Hutchings expected healthy economic growth rates to bring confidence to retailers, but warned inflation would put further upward pressure on interest rates.
 

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Luxury secondary market given lift
Eli Lau, Hong Kong Standard
November 1, 2004

The total value of upmarket property transactions in the secondary market will probably hit a six-month high to HK$5.3 billion, real estate agencies forecast.

Centaline Property Agency reported on Sunday that 244 luxury flats, priced at HK$7 million or above, were sold in September for HK$3.14 billion. That compares with 128 deals worth HK$2.09 billion in August.

Centaline research department senior manager Wong Leung-sing predicted luxury property transactions in the secondary market would lift further for the month - official figures have yet to be released - to 400 transactions with total value of HK$5.3 billion. That represents a 60 per cent and 70 per cent rise over September, respectively.

"We have seen very strong buying sentiment in the second-hand luxury market in the last month [October], mainly driven by the release of several new residential projects such as Residence Bel-Air in Cyberport and Bon-Point in Mid-Levels," he said.

The estimated home sales would be a six-month high since April, with 426 luxury properties sold with total consideration of HK$6.23 billion.

Last week, Pacific Century Premium Developments, developer of the luxury Residence Bel-Air project, said it reaped more than HK$2 billion from sales in the past month. It predicts a new batch of detached houses, which it plans to release early next year, could sell for 20 per cent higher than current prices.

Centaline, the largest property agency in Hong Kong, made its forecast after two local developers Cheung Kong (Holdings) and Sun Hung Kai Properties (SHKP) fended off fierce bidding from rivals to net two residential sites for a record HK$14.12 billion in a land auction held on October 12.

Wong predicts overall monthly home sales for last month could rebound to 10,000 worth HK$30.3 billion, up 10 per cent and 25 per cent from September, respectively. "We expect property transactions will continue to climb in the fourth quarter amid bolstered sentiment among prospective homebuyers," he said.

Ricacorp Properties managing director Ivan Ho said a return of market confidence was seen after a price correction occurred in the second quarter.

"Oil price rises and interest rate hikes in the US and China are unlikely to trigger long-term impact on local property market," he said.

Meanwhile, Cheung Kong said on Sunday it fetched HK$136 million from weekend sales. The homes sold included 12 flats at Caribbean Coast in Tung Chung and 30 apartments at Pacifica, a joint venture with SHKP in Cheung Sha Wan. [email protected]
 

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South China Morning Post
November 17, 2004
Vacancy rates fall across city
Peggy Sito

Office vacancy rates have declined across Hong Kong, with multinational companies taking up large amounts of space as the economy improves.

The average vacancy rate fell to 8.3 per cent from 8.4 per cent in September, according to FPDSavills. The vacancy rate was the lowest in Wan Chai/Causeway Bay at about 6 per cent and the highest in Island East at 13 per cent.

The vacancy rate in Central fell to about 7per cent after Societe Generale and Philips Electronics Hong Kong took up more than 140,000 square feet of space at Three Pacific Place.

In Kowloon, Gap International has committed to taking about 75,000 sqft in Millennium City V in Kwun Tong, boosting occupancy rates in this new development to 85 per cent.

Insurance company AIA is taking about 65,000 sqft in Gateway Tower 6 in Tsim Sha Tsui.

The Kowloon market is expected to see new supply as Great Eagle Holdings begins leasing its 700,000 sqft of office space at Langham Place in Mongkok. Asking rents range from $ 10 per sqft to $ 20 per sqft.

In the sales market, 248 office transactions were recorded last month, up from 184 in September and 162 in August, according to Centaline Property Agency.

A total of 1,845 transactions worth $ 11.41 billion were recorded in the first 10 months of this year, against 1,206 transactions worth $ 5.73 billion for the whole of 2003.
 

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If you want to imagine a major earthquake hitting Hong Kong, imagine one hitting New York.
 

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Serious shortage of flats in 2007: experts
Raymond Wang, Hong Kong Standard
November 20, 2004

Hong Kong may face a serious shortage of new apartments in 2007, according to surveyors and real-estate agents, who have lowered their future supply estimates after seeing the government's first quarterly statistics on housing stocks.

As at September 30, the number of unsold units in completed projects in the private housing primary market was 15,000, while about 48,000 units were under construction and unsold, giving a total of 63,000 units that will be available in the next few years, the government said on Friday.

The government report is described as a snapshot rather than a forecast. Its estimate of the number of flats available or which are now being built is about 8 per cent higher than surveyors' forecasts of about 58,000 units.

Centaline Surveyors' managing director Victor Lai said that, based on the government data, about 31,500 units will come on stream each year in 2005 and 2006 - slightly more than the average annual take-up of 30,000.

He said about 3,000 unsold units are likely to be carried forward as supply in 2007.

Lai said that even if demand averages only 28,000 flats a year from 2005 to 2007, a shortfall of 25,000 will probably occur in 2007 - significantly more than his previous estimate of about 14,000.

Midland Realty chairman Freddie Wong said his company, Hong Kong's biggest publicly-traded property broker, has lowered its supply forecast in 2007 to 11,900 units from 14,600 because developers' land banks are running out.
 

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Developers to flatten Hunghom Peninsula; Green groups attack plans for world's largest demolition of new buildings
Gary Cheung
30 November 2004
South China Morning Post

They've never been occupied and now they never will be. The fate of seven new blocks in a harbour-front Hunghom housing estate has been decided - they will be torn down for redevelopment into luxury flats that are likely to bring a windfall of nearly $6 billion for the developers.

New World Development and Sun Hung Kai Properties announced yesterday that Hunghom Peninsula would be demolished - using environmentally friendly methods that they claim will see up to 95 per cent of the 190,000 tonnes of construction debris recycled.

It will be the largest-ever demolition of new buildings in the world.

Green groups and educators criticised the decision to tear down the blocks, saying it sent the wrong message to Hong Kong's young that profits were more important than environmental protection.

The demolition, expected to take about 10 months, is likely to start next June. The redevelopment will then take another three years.

Stewart Leung Chi-kin, executive director of New World Development, said the redevelopment would bring huge social and economic benefits to Hong Kong.

Mr Leung said three options had been considered for the site - selling the flats as they are, extensive renovation or reconstruction.

"Redevelopment will help create more than 1,000 new job opportunities and raise government revenues from increased stamp duty," Mr Leung said.

He said it would be a "massive waste" if the site of the estate - built as a Home Ownership Scheme project to help meet government housing supply targets, left vacant to stabilise property prices, then sold to developers - was not used to its full potential.

"In correcting the mismatch in land resources, we demonstrate to our next generation that if a mistake is made, one should have the courage to put it right," he said.

Kwan Chuk-fai, spokesman for NWS Holdings, a subsidiary of New World Development, said: "It will be Hong Kong's biggest environmental project and a new learning process for our students."

Surveyors estimate the redeveloped flats could be sold at $8,000 to $9,000 per square foot, earning the developers a net profit of nearly $6 billion.

Company sources said flats would range from 900 to 1,000 sq ft, with penthouses about 2,000 sq ft.

Eric Tung Chi-ho, executive director of Sun Hung Kai Real Estate Agency, said hydraulic crushers, instead of jackhammers, would be used to reduce noise and dust from the demolition. Concrete would be crushed for reclamation, while other materials would be donated to charity or recycled.

Mr Tung said only a few thousand tonnes of construction debris would be dumped into landfills. In compensation for that waste, money would be donated for green purposes. A concern group would also be set up to monitor the project.

A spokeswoman for the Environment, Transport and Works Bureau said no waste management plan for the demolition had yet been received from the developers.

She said the bureau was concerned about the demolition plan, including its environmental impact and construction waste.

The government would consult the Advisory Council on the Environment on the demolition application, she said.
 

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South China Morning Post
December 15, 2004
Office rents expected to surge 35pc
Foreign investors may move in as vacancy rates hit four-year low

Ernest Kong

Increasing office rents will lure more foreign investment into the sector, according to property consultant Jones Lang LaSalle.

Rents for Hong Kong grade A office space will jump by as much as 35 per cent next year due to the lowest vacancy rates seen since 2000, the company projects.

"An increase in rental yield will fuel foreign investment activities and push up office transactions," Jones Lang LaSalle managing director Fung Kin -keung said.

Mr Fung said the Central office vacancy rate - which dropped to 7.3 per cent in the fourth quarter from 8.6 per cent in the third - was nearing a "frictional" vacancy level associated with normal turnover.

The office vacancies rate stood at 6.8 per cent in 2000, the height of the technology bubble when demand for space was strong.

The consultant said office rents in Island East had edged up 6.2 per cent since September while vacancies stood at 13.6 per cent - the highest among major Hong Kong business districts.

"It will still take some time for rent in non-core office areas to pick up, but rents have already started to increase, albeit at a slower pace than in core areas," Mr Fung said.

Kenneth Tsang Ky-sung, Jones Lang LaSalle's Greater China market head of research, said high investor expectations and a drop in the supply of Central office space had boosted office sector investment over the past 11 months.

Office transactions came to $ 9.63 billion in the year to last month, compared with $ 1.72 billion for the whole of last year.

"The market will enter a window of short supply between 2005 and 2006, with new office supply concentrating in decentralised areas," Mr Tsang said.

Property consultant Colliers International said current effective rents for office space in Island East, which factors in incentives such as initial rent -free periods offered by landlords, were $ 12.69 per square foot per month, compared with $ 11.96 three months ago. Effective rents in Central have increased to $ 32.32 per square foot per month, from $ 27.54 in September.

Simon Lo Wing-fai, a director with Colliers International research department, estimated the current capital value of Central office space about $ 14,000 per square foot, up from $ 12,000 per square foot three months ago.

"We have seen increasing interest in the office sector from foreign investors in the past few months. While some of the more opportunistic funds are eyeing appreciation of capital value, most of them are considering both the potential increase in office rent and capital value," Mr Lo said.
 

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Discussion Starter #17
Office market looks promising
Henry Chan
19 December 2004
South China Morning Post

Life might be better in the Hong Kong office market than the residential market next year.

Home prices are not likely to climb dramatically. Average income is forecast to rise only 2.8 per cent, rental yields are already less than blue-chip equity dividend yields, and rental income is insufficient to cover mortgage instalments. Mortgage rates are also poised to surge higher when the hot money leaves Hong Kong. Nevertheless, prevailing home prices should be sustainable if income stays firm and interest rates remain relatively low.

But the office market, especially among grade-A and B properties, looks better. The main reasons are the large differential between rents for grade-A and B offices in Central and other districts, and the lack of new supply in all office grades.

As recently as September, average rents of Central grade-A offices recorded by the Ratings and Valuation Department was $301 per square metre, while the figure was as low as $122 in Wan Chai and Causeway Bay, and $130 in North Point and Quarry Bay. The cheaper properties, which are just as good in terms of working environment, will be a powerful incentive for non-finance tenants to move away from Central.

Recent transactions reveal that rental yields are falling in the Central area. For example, yields on some grade-A office units at 9 Queen's Road Central are as low as 1.6 per cent, while a unit in ICBC Building is a more reasonable 4 per cent. Recent advertisements suggest that even some units at Lippo Centre can be purchased at a yield of only 3 per cent.

Actual yields after deducting management fees, rates and tax will be even lower. Property investment counters with grade-A and B office holdings outside Central will probably earn sharply higher rental income when existing leases are renewed next year.

All this brings me to an excellent company, but trading at rich valuation. The value of Hang Lung Properties (HLP) is relatively easy to evaluate compared to other residential property development companies as all of its properties for sale are completed. What catches the eye is the huge embedded profit from its available housing stock.

For the financial year ended June 2005, HLP is forecast to record sales of $8.29 billion and earn profit of $3.17 billion from four major residential projects.

According to my estimates, the company will close out this year with group sales of $10.7 billion, up 136 per cent year on year, and operating profit of $4.76 billion, up 66 per cent. Taking into account its minority interest in the Aqua Marine development, net profit should be $3.54 billion, up 71 per cent, or $0.965 per enlarged share.

Value of the property investment business standing alone from June 2007 onwards could be $8.6 per enlarged share. Keep in mind that office and shop rentals do fall when times are tough.

The company is planning to issue 370 million new shares at an offer price of $12, a level which appears very close to the company's present value.

The placement will bring in proceeds of $4.4 billion, which will boost its firepower to acquire more land. The company has said it intends to buy land in China, but given the possibility of a slowdown in the mainland residential property market, I believe that will probably not happen in the near term.

Taking into account present value of net profits of the coming three fiscal years, free cash distributable after setting off all current liabilities, and present value of property leasing business, I got a total present value of $13.7 per share, so the offer price of $12.15 is probably close to fair value.

Bear in mind that actual selling prices, sales volume and profit from sales could be lower than my estimates.

Value investors should take advantage of any considerable declines in the share price of HLP to acquire a stake in this excellent company.

Henry Chan is the deputy head of research at Quamnet. He does not own shares in HLP.
 

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Ritz-Carlton to open world's highest hotel in Hong Kong
December 21, 2004

HONG KONG (AFP) - The United States based Ritz-Carlton hotel group is to open the world's tallest hotel, with a new 300-room state-of-the art property at the top of a new Hong Kong skyscraper, the company said.

The hotel will take up the top 13 floors of a 100-storey harbourside "megatower" to be opened in the Kowloon district in 2009, a statement from the company said Tuesday.

Ritz-Carlton also plans to open a new hotel in the Pudong area of China's Shanghai.
 

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The press release with more info from Sun Hung Kai Properties:

http://www.shkp.com.hk/en/scripts/news/news_press_detail.php?press_id=3156

The Ritz-Carlton Hotel Company Announces Plans for New Hotels in Hong Kong and Shanghai; At 1,574 Feet, Kowloon Site Will Be The World’s Tallest Hotel Building


21 December 2004

The Ritz-Carlton Hotel Company, L.L.C., of Chevy Chase, MD (USA) today announced plans to open a new 300-room hotel in Hong Kong in 2009 which will be a showcase of contemporary design as well as the highest hotel in the world. Additionally, a letter of intent has been signed to open a second Ritz-Carlton hotel in Shanghai on Century Boulevard in the heart of Pudong’s Lujiazui District.

Both hotels will be owned by Sun Hung Kai Properties Limited, one of the largest real estate companies in the world operating in Hong Kong and mainland China.

The 1,574-foot-tall Ritz-Carlton will soar above the city’s skyline and harbour, becoming a landmark structure from its strategic location above Kowloon Station on the Hong Kong Airport Railway line.

Since 1993, The Ritz-Carlton Hotel Company has operated one of the region’s most successful and award-winning properties, The Ritz-Carlton, Hong Kong in the Central District, under the direction of regional Vice President, and General Manager Mark Lettenbichler. The company will continue to operate this hotel.

The new hotel will occupy the upper 13 floors of a 100-storey plus tower designed by the renowned architectural firm of Kohn Pederson Fox Associates PC. The site will be the home of a major mixed-use development, including condominiums, office space, retail and serviced apartments.

Designed to make an impressive architectural statement, the new Ritz-Carlton in Kowloon will match its exterior quality with equally stunning interior appointments. Luxuriously-appointed rooms and suites will be spacious, featuring the latest in technological enhancements and the finest design elements. Windows will overlook Victoria Harbour with 360 degree panoramic views. In addition, the signature Ritz-Carlton Club level will provide an exceptional level of privacy and exclusive services for guests, including complimentary, round-the-clock food presentations and dedicated butler/concierge services.

Three fine-dining restaurants will be complemented by The Lobby Lounge and Bar. Meeting space totaling 1,200 square meters, including a grand ballroom of 640 square meters, will offer customers an array of choices from board meetings to social functions. Of special note will be an indoor swimming pool, complemented by an outdoor swimming pool, set high atop the hotel. A world class spa and wellness center will occupy the top floor, offering a unique vantage point for Ritz-Carlton guests.

“Asia continues to provide the best strategic growth opportunity for The Ritz-Carlton Hotel Company,” notes Simon F. Cooper, President and Chief Operating Officer. “We are proud to partner with Sun Hung Kai Properties in the development of this extraordinary new property. The location offers significant advantages because of planned development in the area, as well as access to vital transportation links. This hotel will offer both our corporate and leisure guests an address that is exclusive, as well as highly convenient.”

Sun Hung Kai Properties’ Chairman & Chief Executive Walter Kwok said, “We are very pleased to have The Ritz-Carlton as the operator of this magnificent six-star hotel which will occupy the top floors of the 1,574-foot mega tower. This property forms an important link in the Kowloon Station development and will be the highest elevated hotel in the world. Our Kowloon Station development will offer residential, office and retail space along with the luxury hotel, all designed and built to the most exacting standards. We are confident that the world-famous Ritz-Carlton hospitality and service will make this one of the finest hotels on an international scale.”

The Ritz-Carlton Hotel Company, L.L.C. of Chevy Chase, MD, (USA) currently operates 58 hotels in North America, South America, Europe, Asia, the Middle East, Africa, Asia, Mexico and the Caribbean. It is the only service company to have twice earned the prestigious Malcolm Baldridge National Quality Award, which recognizes outstanding customer service. For more information, call toll free, 1-800-241-3333, contact a travel professional, or consult the web site at www.ritzcarlton.com.

(Issued by The Ritz-Carlton Hotel Company, L.L.C. of Chevy Chase, MD, USA)
 
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