1) Hong Kong home prices drop for the third consecutive month since October
Hong Kong private residential prices dropped 2.4% month-on-month (MOM) in October, a greater decline than in September and August, and a total fall of 3.6% after peaking in July, according to the Rating and Valuation Department. Despite a continued decline, residential prices increased 7.8% in the first 10 months. Residential prices for flats with saleable area less than 430 sq ft (40 sq m) had the largest drop, down 2.5% MOM. Larger units, with saleable area of 1,076 sq ft (100 sq m) or above, had the smallest decline of 1.8% MOM. (Source: SCMP, 30 November 2018)
According to the latest Residential Mortgage Survey conducted by the Hong Kong Monetary Authority, buyers are shifting away from the Hong Kong Interbank Offered Rate (HIBOR) linked mortgage loans to HSBC’s Best Lending Rate linked mortgage loans, in view of HIBOR’s quick rise. The latest meeting minutes from the US Federal Reserve pointed to the strong likelihood of another quarter-point increase of the federal fund rate. With interest rates rising and buying sentiment continuing to be affected by concerns about the US-China trade war, we expect residential prices to drop further down by 3.3% in 2019, until an expected recovery happens by end of H1 2019.
2) Warehouse rental resilient while market uncertainties extend into H1 2019
At the post-G20 summit meeting in Argentina, the US and China agreed to suspend the new trade tariffs for 90 days, including the 25% tariffs on USD200 billion worth of Chinese imports at the beginning of 2019. Within the 90 days, the White House said that the two leaders agreed to discuss the structural changes with respect to intellectual property protection, forced technology transfer, non-tariff barriers, cyber intrusion and cyber theft, as well as services and agriculture. Meanwhile, they added that China would agree to purchase a substantial number of products from the US to improve the trade balance between the two countries. (Source: Reuters, 1 December 2018)
The 90-day halt to new tariffs should not reduce market uncertainties as it does not represent a clear ceasefire between China and the US. The Head of US Macroeconomics at Oxford Economics commented that the tensions will likely escalate in 2019, as he believes the current negotiation point is similar to the previous point six months ago prior to the first round of bilateral tariffs.1 For Hong Kong, despite the strong external trade figures in October and the rising warehouse rents in Q3 2018, we believe local economy and total exports activities should slow in H1 2019. We also expect Hong Kong warehouse rents to remain resilient with a slower growth rate of 4.5% YOY between 2018 and 2022, compared to an 8% growth for 2018.
1 Research Briefing | US - G20 Summit: Trump-Xi détente, 3 December 2018
3) A moderate pick-up of retail sales shows headwinds as Hong Kong enters the year-end peak season
The value of retail sales in October amounted to HKD39.7 billion (USD5.1 billion), representing an increase of 5.9% over the same month in 2017, according to the Census and Statistics Department. Over the first ten months combined, retail sales grew by 10.6% YOY. The highest sales growth in October were recorded in the categories of electrical goods and other consumer durable goods, as well as in medicines and cosmetics which jumped by 16.1% YOY and 14.9% YOY, respectively. Jewellery and watches sales increased by 3.3% YOY. However, supermarket sales and food, as well as alcoholic drinks and tobacco sales declined by 0.9% YOY and 2.0% YOY, respectively. (Source: Census and Statistics Department, 30 November 2018)
Following September’s weak retail sales growth, October showed improved results. A higher influx of tourists from the mainland, supported by the opening of the new Hong Kong-Zhuhai-Macau Bridge has lifted inbound tourism and promoted retail sales. While we believe that the overall retail sales performance should continue to be supported by a firm local economy and more visitor arrivals, the trade dispute between the US and China and the depreciation of the Yuan may increase pressure on the sales of high-value items. October marked the second consecutive month of subdued jewellery and watch sales, recording low single-digit growth, while medicine and cosmetic sales growth rebounded. The city’s largest jewellery retailers expect sales growth to slow in the coming months.2 Given that the jewellery and watches sector has accounted for 18% of overall retail sales this year, retail sales are likely to grow at a slower pace during the year-end holiday season. We expect the full year retail sales growth to be 10% for 2018 and rent growth for high-street shops to be 1%.
2 Rapaport News, 2 December 2018