1) Hong Kong and China bank sectors are vulnerable to crisis due to rising debt
Bank of International Settlements (BIS), known as the central bank for central banks, said in its quarterly report that China and Hong Kong are among those most vulnerable to a crisis because of rising debts, with both the credit-to-GDP gap and the debt service ratio (DSR) – early warning indicators of systemic stress, flashing red. Among 44 economies tracked, Hong Kong came first in the measure of the deviation of an economy’s credit-to-gross domestic product ratio from its long-term trend, indicating an unusually rapid debt growth in recent years. The rising debt in Hong Kong was mainly due to high property prices and increased lending by Hong Kong banks to borrowers in mainland China. However, BIS had a stable outlook on Hong Kong banks, as they have some of the best underwriting standards globally. The banking sector in mainland China was estimated to be riskier due to rapid growth in household debt, including borrowing to fund consumer spending, property purchases, and investments. (Source: SCMP, 12 March 2018)
We believe that the concerns about the rising risk exposure of Hong Kong banks due to rising property prices are overstated. Firstly, local banks are less exposed to risks than they were in 2008 as the HKMA has been strengthening regulatory supervision. Secondly, according to Hong Kong Monetary Authority, Hong Kong’s aggregate balance of interbank liquidity of HKD180 billion (USD23.1 billion), being 137 times the interbank liquidity in March 2007, should be enough to absorb the impact of rising interest rates. Thirdly, with a positive economic outlook, full employment and rising household income, the risk for a major negative property price adjustment is limited. However, we should keep an eye on “grey rhinos” (highly possible yet ignored threats) in China in association with rising debt levels which could affect Hong Kong’s overall economy.
2) Hong Kong Air Cargo launches new operation arm to build integrated logistics hub
Freight carrier Hong Kong Air Cargo has launched a ground transportation operation, Hong Kong Air Cargo Logistics, to serve the local Hong Kong market in tandem with the airline. Zeng Meng, Assistant Chief Executive Officer of Hong Kong Air Cargo, mentioned that with the completion of the Hong Kong-Zhuhai-Macao bridge, and the Shenzhen-Zhongshan bridge, as well as the ‘Belt and Road’ and the ‘Guangdong-Hong Kong-Macao Greater Bay Area’ initiatives introduced by the Chinese government, the development of a fully integrated transportation network in the Greater Bay Area will be the focus of Hong Kong Air Cargo – aiming to build Hong Kong as a logistics hub. (Source: Air Cargo News
, 16 March 2018)
Rising warehouse rents have become one of the major concerns for local warehouse users. The completion of major regional infrastructure projects, leading to the emergence of the Pearl River Delta ‘One-Hour Intercity Commuting Circle’, will enhance connectivity between Hong Kong, Macao, and mainland China. The subsequent shorter travel times will allow for some local companies to justify setting up warehouse spaces between different cities within the Greater Bay Area. Hong Kong needs to retain its advantages in air logistics and to upgrade obsolete warehouse facilities to keep its logistics hub status. We are disappointed that there has been no new logistics land supply in the 2018/19 land sales programme.
3) Retail rents on second and third-tier high-streets remain under pressure
In Central, shop no. 2 on G/F and the attic located at 2-10 Gough Street has been leased to Aesop, an Australian skin care brand, for a monthly rental of HKD130,000 (USD16,574). With a total gross floor area (GFA) of 1,800 sq ft (167 sq m), comprising 900 sq ft (83.6 sq m) on the ground floor and 900 sq ft (83.6 sq m) in the attic, the average rent per sq ft is about HKD72 (USD9.2). The previous tenant REPLAY, an Italian jeans brand, leased the shop in 2014 for HKD230,000 (USD29,323) per month and moved out in 2016 after its lease expired. The shop had remained vacant since year-end 2016. The new rent of Aesop is HKD100,000 (USD12,748), 43% lower than the monthly rental consideration of REPLAY. (Source: HKEJ
, 19 March 2018)
Rents outside the first-tier streets in popular shopping districts have remained soft. Since reaching its peak in 2013, the overall high-street rents have dropped by around 44%. Lifestyle brands have been seizing the opportunity to secure a prime location on first-tier streets under favourable rental conditions. This, in turn, continues to put second and third-tier street shops at a disadvantage while prime spots on first-tier streets have started to regain momentum. We believe the rental market will become more stratified in 2018, with a widening gap between first-tier and non-first-tier streets within the same district until the retail market experiences a full recovery.