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DEALS: A landmark of one’s own

One of the largest single-asset deals in Hong Kong’s commercial sector in recent years was done in November when China Life Insurance agreed to invest HK$5.8 billion (€700 million; $755 million) to acquire half of the One HarbourGate complex.

The Beijing-based insurance group, via its wholly-owned subsidiary China Life Insurance (Overseas), signed a sale and purchase agreement with Wheelock and Company to purchase the developer’s en-bloc office tower and the adjoining retail area in the Kowloon district of Hong Kong.

The 15-story Grade A office tower, scheduled to be fully constructed by the end of next year, will serve as China Life’s headquarters in Hong Kong, making the insurance group the third company in three years to acquire a landmark property in the island-city for its own occupancy. Incidentally, Wheelock has been the seller in each of these mega transactions. Last year, the global banking and financial corporation Citi paid HK$5.4 billion to acquire the East Tower in the One Bay East complex in Kowloon East to turn into its headquarters. This was preceded by Manulife’s HK$4.5 billion acquisition of the West Tower in the same complex in April 2013, eventually to be renamed Manulife Tower after its completion next year.

Given the existing supply and demand fundamentals in Hong Kong’s commercial property sector, such deals – wherein firms occupy the property they buy instead of leasing it out – are expected to become a key trend as companies consider future occupancy costs, according to John Davies, executive director of institutional investment properties at CBRE, Hong Kong.

According to the year-end forecast report released by Colliers International last month, rents in Kowloon have levelled out in the last few months due to lackluster demand and tenants opting for a shorter lease period. The current monthly rent for Kowloon, where One HarbourGate is located, is estimated to be HK$40 per square foot, significantly lower than the HK$90 rent in the city’s Central district. Additionally, an anticipated increase in office supply in Kowloon next year should also lead to a rise in vacancy rates from 2.9 percent to 5 percent to 6 percent, said Patrick Mak, senior director of Kowloon office services at Colliers International.

The trend also signals a change in the strategy of Hong Kong’s developers. According to CBRE’s Davies, very rarely did the developers in the city sell their commercial space in the past, but they are now doing so to invest that money in overseas projects in order to balance their portfolios