Hong Kong's London Love Affair
(Bloomberg Gadfly) -- Brexit's pending arrival has some companies pulling out. Hong Kong investors are going the other way.
It's not just the weaker pound, but also a faith in the British capital's ability to weather a U.K. exit from the European Union and remain a key gateway to Europe.
A third factor: price. Hong Kong has been the world's most expensive property market for two years running, and with mainland Chinese money flowing in, it's hard to make gains.
Prime office space in Hong Kong goes for an average $323 per square foot, including rent, service charges and government taxes, according to real estate consultancy JLL. Capital values of so-called Grade A offices in the city surged 18 percent last year, and 24 percent in the Central district.
Those increases were due primarily to some record-breaking deals, including the $5.2 billion sale by Li Ka-shing in November of a stake in The Center. A greater number of Chinese banks and insurance firms are also expanding their office presence in Hong Kong as the city integrates into the Greater Bay Area.
The price rises have caused yields to plunge to around their lowest level in two decades, according to JLL. Central yields are 2.7 percent, versus 3.5 percent in London's prime office district.
London also has the advantage of being a steadier office market for rental streams. Leases there typically stretch for about 10 years versus around three in Hong Kong.
CC Land Holdings Ltd. is one firm believer. It secured a rental yield of 3.5 percent when it bought into the Cheesegrater, and got Grade A office accommodation and a 5 percent annual yield with its January 2017 purchase of One Kingdom Street, in Paddington. CC Land is also part of a consortium in the running to buy a majority stake in a project nicknamed Gotham City.
The Walkie Talkie building, meanwhile, went to LKK Health Products Group Ltd., a Hong Kong-based maker of herbal personal care products. Built for 470 million pounds ($670 million), the skyscraper sold for 1.28 billion pounds. Li, along with his son Richard, have also made investments in London office space.
The Hong Kong dollar, which is pegged to the greenback, has fallen 4.6 percent against the pound this year, and that weakness may prompt some investors to step back. But as Chinese developers with deep pockets continue to crowd the city, it's fair to say Hong Kong's London love affair is just getting started.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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