Citigroup expects that the performance of office buildings in Central and West Kowloon will outperform other areas next year, benefiting Henderson Land and New World Development

Citi's research report indicates that recently JD.com (09618.HK) agreed to acquire a 50% stake in the Central China Construction Bank Tower from Lixin Development (00488.HK) for HKD 3.5 billion; a local higher education institution purchased the Kowloon Tong Festival Walk office building from Mapletree Pan Asia Commercial Trust for HKD 1.96 billion.

Citi expects that the demand from Chinese enterprises for office buildings will continue to support the Hong Kong office market, driven by factors including: more Chinese tech giants and other industry leaders may follow the example of Alibaba (09988.HK) and JD.com in considering the acquisition of office properties in Hong Kong; an increasing number of A-share companies are dual-listed in Hong Kong and are establishing regional headquarters or R&D centers in the city; and Hong Kong launched the "GoGlobal Task Force" in October to assist mainland enterprises in expanding into international markets.

Citi also observed that the sale of office buildings in Hong Kong is primarily aimed at generating immediate cash flow and optimizing investment portfolios, especially for some regional owners, as they consider growth prospects for commercial properties in other regions (such as Singapore and Australia) in addition to Hong Kong; or establishing strategic partnerships with existing long-term tenants.

In Citi's view, the demand from buyers for office buildings reflects a certain degree of bottom-fishing behavior after the average capital value of Hong Kong office buildings has fallen 52% from its peak; hedging against potential future rental increases, etc.

Citi expects that by 2026, the performance of office buildings in Central (benefiting Hong Kong Land and Henderson Land (00012.HK)) and West Kowloon (benefiting SHK PPT (00016.HK)) will outperform other regions, and it is anticipated that by the end of next year, the rents of major landlords in Central (such as Hong Kong Land and Henderson Land) may stabilize; it also believes that the upcoming quality new supply in West Kowloon, such as IGC, may be competitive in terms of demand, with rental levels roughly equivalent to those in the Eastern District of Hong Kong Island, benefiting SHK PPT.

Considering that the overall new supply has reached a historical high, Citi expects competition in Causeway Bay to become more intense, with Hysan Development (00014.HK)'s Lee Gardens project likely to perform better, while properties in Eastern Hong Kong Island, such as Swire Properties (01972.HK)'s Taikoo Place and East Kowloon, will face certain pressures.

For Citi's ratings and target prices on local real estate stocks, please refer to the accompanying table