1) Investment in real estate market remains firm despite the latest interest rate increase
Hong Kong Monetary Authority (HKMA) nudges base lending rate by 0.25% to reach 1.25% cent to maintain the stability of the Hong Kong dollar peg to the US currency, tracking US Fed move. However, Hong Kong’s banks chose not to adjust the interest rates that they provide to savers or borrowers despite the change in the base rate. HSBC, Bank of China Hong Kong and Hang Seng Bank maintained their best lending rate at 5%. Standard Chartered held their best lending rate at 5.25 %. (Source: SCMP, 16 March, 2017)
With the market consensus for three-0.25% US interest rate rises this year, we expect the local real estate market has already absorbed the latest news. Local banks have chosen not to raise the prime rate due to a competitive mortgage market and a large amount of international money is parked in Hong Kong. We expect the residential property price will increase by 5% in 2017 while Hong Kong’s negative real interest rate environment continues.
2) Higher rent in core-CBD continues to push more corporates to look elsewhere
PRC companies’ strong appetite for expansion in Hong Kong, particularly in the Central leasing market, is a continued trend from last year. With a vacancy rate of 1.5% in Central, we are witnessing PRC firms waiting in line to secure office space in trophy assets such as IFC 1 and IFC 2. PRC companies appear to believe despite the higher rental cost in Grade-A buildings in Central, a presence there can help a company improve its brand image and underlying business because of its prime location and the district’s positioning as the financial hub in Asia.
Since the beginning of the year, 150,000 sq ft (13,940 sq m) of office space in Central has been secured by PRC companies, which represents circa 40% of the total amount leased in 2016. Not surprisingly, we are seeing US and European firms relocate out of core Central due to the increasing rents driven by PRC demand. For example, Freshfields Bruckhaus Deringer and Alliance Bernstein are now committed to moving operations to Quarry Bay.
While core-CBD rent is the most expensive in the world, rent level can drop sharply at a short distance from Central/Admiralty. Improving transport infrastructure and better quality offices have made decentralised areas on Hong Kong Island, such as Quarry Bay and Wong Chuk Hang, more attractive alternatives to corporates currently based in Central. We expect more companies in core-CBD will consider relocating or splitting their offices during their next rent review cycle.
3) Betting on cinema to draw more foot traffic
The government attempts to support the creative industry amid soaring rents. Two commercial sites planned for sale in Kai Tak and Sha Tin are designated to include cinemas in the land leases. Clauses will be imposed to set a fixed number of seats at the cinemas. Modification of such clauses in the first seven years are subject to the approval from the government with a premium payment. (Source: SCMP, 13 March 2017)
Back in the 1970s, cinema was taken into consideration in government’s land use planning. Cinemas were required inclusion in certain leases. As policy changed, the government has relaxed its measures and many landlords have replaced them with retail shops as cinemas generated lower rental. As the two upcoming commercial sites are located in non-core districts, with more residential developments, we believe that the mandatory inclusion of cinemas in land leases will have only a mild impact on land prices. This is because cinemas could help draw pedestrian flows into the shopping malls under the current soft retail market conditions.