Hong Kong, 22 November, 2016 - Economic growth in Hong Kong, though modest, has exceeded expectations so far in 2016 driven by strength in domestic demand, with consumer spending, investment and imports all picking up, and business confidence rising correspondingly. Besides an improving economic background, Hong Kong’s property market continues to be supported by negative real (i.e. inflation-adjusted) interest rates, which the market has enjoyed since late 2009.
While US interest rates are very likely to rise this December, whether they rise rapidly or only gradually over the next few years depends in part on whether the economic policies of Donald Trump as president prove expansionary or contractionary for the US economy. At present this is hard to say; nevertheless, Hong Kong should enjoy negative real interest rates until sometime in 2018. Colliers expects this environment should support capital values in the Hong Kong property market, while the new stamp duty should encourage investors to look beyond the residential market and seek new opportunities in the office, retail and industrial markets.
Speaking at a press conference today, Nigel Smith, managing director, Hong Kong, said: “We expect Hong Kong’s economy to maintain resilient against global uncertainties. However, looking for the opportunities will be harder, unless you know where to look. While the high value service sector continues to expand, other sectors are showing signs of recovery. The overall business confidence has regained momentum and businesses are more positive about their prospects in Q4, 2016.”
Investment Market Spurred by “Hot Money”
The number of property investment transactions above HKD100 million (USD12.8 million) increased substantially in Q3 2016 with the largest increases in residential, strata-title office and en-bloc office transactions. Chinese investors have remained very active in Hong Kong, since investment in the territory provides a simple way to hedge against the possibility of continuing RMB depreciation over the medium term. “Asia remains stable in contrast to global uncertainties in the Eurozone and the US, therefore investors need to re-assess their risk exposure, and this has led to higher demand for Asian properties,” Antonio Wu, deputy managing director, Hong Kong, said.
Office Market: Positive Rent Growth Supported by Improved Business Sentiment
Colliers reveals there is a close relationship between growth in high value added service sectors and growth in Grade A office rents; in fact the growth of the high value service sectors, rather than the overall economy, has a more significant impact on office rent. “Business sentiment in Hong Kong was moving downwards until Q2 2016, which looks as though it was probably the bottom of the most recent cycle. Looking forward, we expect the present rebound in business sentiment to continue over the rest of this year and into 2017, driven by stabilisation in the Chinese economy and modest US economic expansion. This in turn should support positive rent growth. This is the crux of our prediction that the benchmark rent in Hong Kong will rise by 12% between end-2015 and end-2020,” said Daniel Shih, director of research.
While overall office rent market has been edging up, the core and non-core districts have been developing into a two-tier market due to uneven demand and supply. In core CBD locations, rent has been supported by keen interest from mainland Chinese companies and very limited supply. Colliers estimates that office rent on Hong Kong Island will increase by 4% while Kowloon rent will decrease by 7% in 2017 due to new supply in Kowloon East. “We have seen the Wong Chuk Hang office market picking up before the commencement of MTR South Island Line. The current average net effective rent in Wong Chuk Hang is HKD31.9 per sq ft, and we expect a significant rental growth of 19% in 2017. Flexible working space as an alternative solution for cost saving is expected to be widely adopted in the future workplace environment,” Fiona Ngan, general manager of office services, commented.
Local Consumption Driving the Retail Market
The outlook for the retail market remains gloomy due to the fall in tourist arrivals and weaker sales. As a result, both rental and capital values are under pressure. “The focus should shift to local spending as we have seen signs of growth in this segment back to the 2012 level. To remain competitive, retailers should offer authentic shopping experience, introduce niche brands to the market and make good use of social media for promotions,” Cynthia Ng, director of retail services said.
Residential Market: New Stamp Duty to Have Mild Impact
Hong Kong’s residential property prices have remained among the world’s least affordable in 2016. The recent introduction of the new stamp duty has put the price growth on hold. “While the full impacts are yet to be seen, we expect the residential market to go through minor adjustment for the whole year in 2017 following the cooling measures. Developers will build more small units with a price ranging from HKD3 million to HKD5 million and areas adjacent to major infrastructure improvement will see more interest from potential buyers,” Vincent Cheung, executive director of Asia valuation and advisory services forecasted.
Luxury residential rents in 2017 look set to be similar to 2016, with the lower end sector (HKD40K or below) going to be most active. Banking and financial services continues to slow down and most expatriates in this sector will remain conservative with their spending. “Monthly rentals in the HKD40,000 to 80,000 range will remain flat. Luxury rentals of above HKD150,000 will continue to suffer as a lot of expats have now changed to local packages and companies are tightening housing budgets. With the opening of the MTR’s new South Island Line end of this year, expat families are more willing to consider the Ap Lei Chau and Wong Chuk Hang areas, and these will drive prices up,” added Vincent.
Industrial Market to Rebound due to Better Economy Outlook
Due to the weak export numbers, warehouse demand was soft in 2016. “The industrial market has been slowing down due to the policy changes and increasing government inspections. However, with a better overall economic outlook and a growing export sector for 2017, we expect industrial property prices to increase by 3%,” Terence Wong, executive director, industrial services, said.