It’s well known that Hong Kong property doesn’t come cheap, and its office rents have just recently been named the most expensive in the world, for the second year running.
Thus the easiest argument to make is that Hong Kong property prices are at dangerous levels, a bubble set to burst.
You can just point to the fact that residential property prices jumped 30% last year and are fuelled by Chinese investor demand coupled with artificially-low interest rates due to the Hong Kong dollar’s peg to the U.S. one. (Which effectively enslaves Hong Kong to America’s ultra-low interest rate policy)
Yet we have to admit that a counter-argument caught our eye — industrial land prices are soaring. They jumped 38% in the second half of 2009 according to Colliers International. Yields have fallen as a result of rising prices, but they aren’t completely ridiculous. They are still in the 5% range:
Industrial land is less prone to the speculative excess of office or residential property in Hong Kong. It’s not like businesses opt for spare trophy warehouses or buy opulent vacation factories on a whim. There will be speculation as always, but far less.
Moreover, Colliers remains optimistic on industrial land thanks to underlying demand for industrial land from businesses looking to capture economic opportunities via Hong Kong.
Looking ahead, amid a gradual recovery of the global economy, Hong Kong’s external trade performance is expected to improve gradually, which in turn will provide some support for the industrial property market. Moreover, it is reported that two multinational logistics operators have pre-committed to about half of the floor space in Interlink – a 2.4 million-sq-ft logistics warehousing facility in Tsing Yi scheduled for completion in 2012. This highlights logistics operators’ confidence in Hong Kong’s external trade performance in the medium term. It is our prediction that the rentals of the factory and I-O sectors will increase 5% and 8%, respectively, over the next 12 months. In the warehousing sector, rentals are expected to increase 3%-5%, depending on the availability of such physical provisions as ramp access. Meanwhile, we expect the prices of industrial properties to increase 10% over the next 12 months.
This doesn’t mean we’re about to buy a Hong Kong apartment. The property market certainly seems pretty frothy and at risk of major correction, especially if U.S. interest rates rise substantially. As we said above, this is a horribly difficult side of the argument to defend with conviction.
Yet strong demand for Hong Kong industrial land at least suggests that a large portion of Hong Kong’s office and residential property prices is justified by actual economically-driven demand, rather than simply speculation. A 30% spike in residential property prices last year looks far less wild when juxtaposed with a 38% jump for industrial land in just six months.
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