Will investors embrace lower grade offices as price gap widens?

The gap in central for Grade A and B offices is at least $15,000.

Traditional investors may increasingly buy into lower grade buildings as the staggering price growth of Hong Kong’s Grade A offices has seen the price difference with its Grade B counterparts widening to at least $15,000, according to real estate consultant Savills.

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Grade A offices are high-quality newly constructed high-rise office spaces featuring top-of-the-line features and amenities whilst Grade B offices are largely older buildings with fully functional facilities.

Their difference can be gleaned from the rents they command: Grade B offices in Central go for around $25,000 psf whilst Grade A spaces in Central retail for above 40,000 psf. The trend holds true for Wanchai where Grade B offices may be sold between $18,000 to $20,000 psf whilst Grade A counterparts can be traded in the range of $25,000 to $40,000 psf.

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“Investors, especially traditional investors, may be willing to take advantage of the widening price gap and buy into Grade B offices (preferably en-bloc) in core areas to hold for value appreciation, or to more actively pursue conversion / redevelopment opportunities in lower grade buildings to maximise returns,” Savills said in a report.

On the other hand, some tenants may be shunning CBDs altogether in the face of rising rental costs and looking for office spaces in non-core areas like Quarry Bay and Wan Chai.

New completions in Kowloon like Hong Kong Pacific Tower and China Shipbuilding Tower in Cheung Sha Wan are also prime candidates for decentralisation, CBRE said in an earlier report.