1) MSCI’s inclusion of Chinese A shares will benefit Hong Kong

News

MSCI’s decision to add mainland Chinese stocks to its benchmark emerging markets index has been welcomed by officials from mainland China and Hong Kong, as well as global investment managers. After three previous rejections, the latest admission will bring Chinese stocks into the global mainstream. The Index compiler says Stock Connect has been ‘a game changer’ for the opening up of the A-shares market. The addition is widely regarded as a landmark moment in China’s road to opening up its vast domestic financial market to the world, boosting its credibility as a global economic power, and strengthening the international status of its currency. (Source: SCMP, 21 Jun 2017)

Research View

The inclusion of Chinese A-Shares in the MSCI emerging markets index is an important step for the further internationalisation of China’s huge domestic financial markets. The move may also help boost the Chinese Renminbi’s status as an international currency. Hong Kong ought to profit from the strengthening of both the A-shares market and the RMB’s global status by serving as the gateway for foreign capital to access mainland Chinese market under the existing Stock Connect scheme. From the property market perspective, the local financial sector, which is the largest tenant group in the core CBD area, ought to benefit from latest inclusion. This change should shore up the demand for Grade A office space down the road.

2) Commercial properties at core-CBD areas are still attractive to institute investors

News

An American fund has acquired a batch of premises in Hong Kong Trade Centre at 161-167 Des Voeux Road Central in Sheung Wan for a total consideration of HKD500 million (USD64 million). The premises involved a shop on G/F and office units on 10-13/F. Based on a total gross floor area of 20,531 sq ft (1,908 sq m), the average price is about HKD24,353 (USD3,138) per sq ft. Meanwhile, office units no.21 – 22 on a mid-floor in Bank of America Tower in Central were sold for HKD108 million (USD14 million) or HKD33,920 (USD4,371) per sq ft. (Hong Kong Economic Times, 22 June 2017)

Research View

Investment sentiment towards commercial properties in core and fringe CBD areas has remained buoyant since the record sale of the Murray Road Car Park site. Apart from active PRC investors, the investment market has benefited from the wave of expiry of funds. Office premises have been the most popular category for private equity funds due to a positive economic outlook and stability. Increasing rents on Hong Kong Island have also driven up the demand by end-users who expect their real estate costs continue to increase. We expect office rent and price of Central and Admiralty to grow by 4.7% and 15% for 2017 respectively.

3) PRC developers outbidding local developers in all residential land sales in 2017

News

Shenzhen Investment, working in partnership with sister company Road King Infrastructure, beat nine rival bidders for the Tuen Mun site, paying HKD3.17 billion (USD409 million) or HKD6,700 (USD863) per sq ft which is 49% higher than the market’s consensus expectation. This is the first time for Shenzhen Investment, the largest listed real estate company under Shenzhen State-Owned Assets Supervision and Administration Commission, to invest in Hong Kong’s property market. (Source: SCMP, 22 June 2017)

Research View

Mainland Chinese companies have won all five residential sites on the Government land sale list in 2017, outbidding local developers with higher than expected prices. The latest tender result shows that sites in the New Territories can attract strong interest from mainland Chinese developers as well. In our view, local medium-sized developers will have to adopt a more aggressive pricing strategy in order to win sites in future. Amongst the three residential sites that have been put up for tender by the Government for the coming months, we expect the Cheung Sha Wan site will be the most sought after by mainland developers due to its premier waterfront location. Other developers which are selling properties in the West Kowloon area should benefit from another record land sales result in Cheung Sha Wan.

4) Financial Secretary warns about Hong Kong’s dangerous property market

News

Hong Kong’s property market is in a dangerous situation and vulnerable to a correction according to Financial Secretary Paul Chan. The warning comes as rate hikes by the US Federal Reserve send borrowing costs higher in Hong Kong. He is concerned about a correction in Hong Kong, the world’s priciest housing market as no one can tell how deep the adjustment will be or what is the appropriate level of adjustment. Efforts by authorities to cool demand through tighter rules for lending and other measures have so far had little impact on home prices in Hong Kong, as developers bid up the cost of land to new records and borrowing costs remain low. Predictions of a property crash in Hong Kong have been proven wrong in recent years as the city shook off crises, epidemics, an ageing population and China’s slowdown. (Source: Bloomberg, 20 June 2017)

Valuation View

There has been great debate about where Hong Kong residential prices are headed, with a frequent argument being that the current real interest rate (RIR) is an indicator of what will happen to prices in the near-term. In 1997, the Asian Financial Crisis caused a recession and a crash in the property market, with the RIR rising as liquidity tightened. However, even as inflation eased prices still declined. Moving along to 2003, when the market bottomed primarily due to the SARS outbreak, the RIR was in strongly positive territory. By the time the RIR fell briefly to zero a year later, prices had recovered by almost 45%. The RIR then turned negative during the Global Financial Crisis of 2008-09 and has remained negative almost ever since. Over this period, Hong Kong residential prices have risen steadily and rapidly. It is noticeable, however, that the RIR has risen steadily since about the start of 2015, and is now nearing zero again. The principal cause of this increase has not been rising interest rates, but a reduction in CPI inflation in Hong Kong over 2015 and 2016.

What can we assume from this? It is that the current RIR is not an accurate gauge on when to enter or exit the Hong Kong residential market. What appears to be important is the long-term expected RIR. Although short-term nominal interest rates have risen in Hong Kong, most observers now expect US interest rates – to which Hong Kong interest rates are effectively tied as a result of the territory’s currency peg – to increase only gradually over the next year or so. At the same time, CPI inflation in Hong Kong may pick up slightly as a result of the strengthening economy. Consequently, it seems unlikely that the RIR will rise sharply over the next twelve months. On the contrary, we retain our view that the RIR will probably not move decisively above zero until late 2018. Barring any unexpected shocks to the economy, despite the relatively large supply coming on stream, we do not anticipate a major correction to Hong Kong residential prices over at least the coming year.