CB Richard Ellis' Views on the Hong Kong and Macau Real Estate Investment Markets

On the back of strong economic fundamentals and optimistic outlook, investor sentiment in Hong Kong remained generally positive in the first quarter of 2007. Demand from both investors and end-users persisted, although the volatility in global and local stock markets has led some investors to become more cautious. As for the Macau’s investment market, the booming of the development of entertainment complexes in Macau which commenced in 2003-2004 reached its greatest intensity in 2005. By mid-2006, however, it had abated slightly, as concerns emerged in some quarters about whether demand would ultimately be sufficient to support the large number of entertainment facilities being planned.

As for Macau’s investment market, the expiration of the STDM monopoly over Macau’s gaming industry at the end of 2001 led to a boom in the development of entertainment complexes. The boom reached its peak in 2005, however from 2006 onwards, investors are skeptical on the massive scale of retail development presently underway appears to be out of line with demand that can be realistically expected in Macau in the near future. Concerns were also expressed about whether Macau’s existing infrastructure would be capable of supporting the operation of the facilities and providing access to the number of patrons necessary for their success.

In January 2007, news were spread in the market that Richard Branson, Chairman of the Virgin Group, was in discussions with the Macau Government about the possibility of developing a US$3 billion entertainment complex on the Cotai strip. It provided some encouragement to the market but did not completely dispel the mood of caution with respect to further major investment in Macau.

Major entertainment complexes now under development or in the active planning stages include Ponte 16, situated in an old waterfront district at the end of Xin Ma Lu and Fisherman’s Wharf, located near the existing Hong Kong-Macau Ferry Terminal. In addition, vast majority of major shopping malls being developed in Macau are now embedded within large-scale entertainment and hotel complexes now under development along the Cotai strip. By 2010, these mega-projects will collectively provide 5.5 million sq. ft. of retailing facilities in Cotai. The projects include The Venetian (1.0 million sq. ft.) scheduled for completion in mid-2007, Macau Studio City (1.4 million sq. ft.) scheduled for completion in two phases in early 2009, City of Dreams (50,000 sq. ft.) scheduled for completion in late 2008 and several unnamed projects in Cotai, including the possible development by the Virgin Group.

Andrew Ness, Head of CBRE Research, Asia, commented, ”The skeptics in the commercial viability of ‘new Macau’ as one of the world’s pre-eminent gaming and entertainment centres may have failed to consider the persistence of strong PRC interest in Macau tourism with Guangdong province alone now having a population of 92 million.”

Besides, major improvements in accessibility to Mainland China presently underway in Cotai will bring positive impact to the market. These include the new Taipa ferry pier, scheduled for completion in mid-2008, which will provide a number of direct ferry routes linking cities in the Pearl River Delta directly to Macau, and the upgrading and expansion of the Lotus Bridge/Hengqin border control point into another major passenger crossing between Zhuhai and Macau, complementing the existing crossing at Praca das Portas do Cerco. These infrastructure improvements are expected to substantially increase the flow of Mainland Chinese tourist into the entire city, with the Cotai area being a principal beneficiary.

For those who are skeptical about the longer term viability of some of the major retailing complexes now under construction in Macau are perhaps unaware that there are indications that a number of substantial European retailing concerns, some of which control dozens of luxury retail brands, may be seeking a head lease for a sizeable block of the retail space under development in Macau. These retailers’ intention of creating a showcase for high-end European luxury goods on the central Cotai strip will, in the fullness of time, cause Cotai to evolve into one of Asia’s most unique concentrations of entertainment and leisure facilities.

Andrew Ness added,” Despite the skeptics in the commercial viability of the massive scale of retail development presently underway in Macau, we strongly believe the increased accessibility that Cotai is going to enjoy in 2008 will boost the number of Mainland Chinese tourists. The performance of The Venetian, scheduled to open in mid-2007, will be seen as a key indicator of the viability of the retailing complexes under development, and a strong performance would be likely to spark another substantial wave of overseas investment interest in Macau.”

In Hong Kong’s investment property market, despite some investors become more cautious due to volatility in recent global and local stock markets, demand from both investors and end-users persisted. So far in the first quarter, there have been 52 transactions worth over HK$100 million. The total transaction amount is about HK$15.3 billion. Investment in office market comprises 24% (as compared to 39% in 2006) and that of residential market reaches 29% (20% in 2006), 22% of the investment goes to retail market (16% in 2006) and 12% is for industrial market (7% in 2006). Investment on sites sums up to 12% (as compared to 14% in 2006).

Rick Santos, Managing Director of CB Richard Ellis Hong Kong, said, “In the office sector, both local investors and foreign funds were keen in acquiring quality office properties, especially in the CBD, where new supply is scant. In the meantime, aggressive offers from landlords resulted in a reduction in the number of en bloc office transactions in the first quarter. Notable transactions included the purchase of Crocodile Houses 1 and 2 and Ananda Tower, by an overseas fund under Citigroup for HK$1.07 billion (HK$8,350 per sq. ft.) and HK$450 million (HK$7,697 per sq. ft.), respectively.”

Foreign institutional funds have widened their investment focus to include retail properties, acquired in the context of value-add, repositioning plays. Overseas funds made two major retail property transactions in the quarter to date: Alpha Partners Investment, the property investment fund of Singapore’s Keppel Land, acquired Mong Kok Computer Centre for HK$750 million (HK$28,846 per sq. ft.), while a property investment unit of Merrill Lynch purchased Golden Plaza in Mong Kok for HK$530 million (HK$11,557 per sq. ft.).

Regarding the residential sector, both investors and end-users were active in seeking luxury residential properties, and the results of the government’s sale of two luxury residential plots in March provided a further psychological boost to the market. Transactions of luxury properties in the quarter to date include the sale of penthouse at the Legend in Jardine’s Lookout for HK$128 million which sets a record apartment price of HK$33,300 per sq. ft. and the sale of a house at 8 Severn Road, The Peak, which fetched HK$101 million (HK$29,785 per sq. ft.).

The industrial sales market has been relatively quiet thus far in the first quarter. Major en bloc transactions included the acquisition of Wai Yuen Tong Medicine Building in Kowloon Bay for a consideration of HK$190 million (HK$1,544 per sq. ft.) and the sale of the Q P L Industrial Building in Kwai Chung for HK$178 million (HK$417 per sq. ft.).

Rick Santos added, “We continue to see strong momentum on foreign investment in various sectors of the Hong Kong property market. Meanwhile, traditionally foreign institutional funds which focus on investing on prime office properties have seen a trend of diversifying their investment in new sector, like the recent transaction of the en-bloc purchase of Golden plaza in Mong Kok.”

Rick Santos, who is also the Head of Institutional Investment Properties, Asia, sees positive prospects in regional investment, "Investors are more likely to select those profitable markets with substantial growth, the higher rate of return in the emerging markets like India, Philippines and second-tier cities of China, captivates the investors who are willing to take higher risk and hence higher volume of investment will be resulted for those markets.”

Since CB Richard Ellis was first established in Hong Kong in 1978, the company has grown to become one of the leading International Property Consultants in Greater China.