1) Hong Kong’s PMI dropped to the lowest in two years as a full-blown trade war looms on the horizon

News

Softer demand and economic uncertainty have decreased business confidence to the lowest point in two years as the Nikkei Hong Kong Purchasing Manager’s Index (PMI) edged down to 47.7 in June. According to Nikkei, there are three main reasons for the deterioration. Firstly, both output and new orders continued to drop due to high competition, poor weather, and a weaker economic environment affected by the China-US trade frictions. Companies, especially from China reported softer client demand. Secondly, a global commodity shortage, a surge in raw material prices, and stretched global supply chains have led to a sharp increase in purchasing costs. Moreover, business sentiment remained negative due to increasing trade tensions between the US and China. (Source: IHS Markit, 5 July 2018)

Research View

The declining PMI indicates that Hong Kong’s growth for the rest of 2018 might moderate, following a strong Q1 GDP growth, as the PMI figures exhibit a strong correlation with Hong Kong’s GDP with a two-month lead. We believe that the China-US trade tensions are likely to be one of the main reasons for the deterioration of business sentiment. Moderating export momentum, increasing interest rates, and a shrinking monetary base should suggest a more moderate growth for local GDP which increased 4.7% YOY in the first quarter. However, Hong Kong’s GDP growth and export value should stay positive despite slower rates, with Oxford Economics forecasting annual growth rates of 3.6% in 2018 and 2.4% in 2019. We expect warehouse prices and rents to achieve a full year growth of 15% and 8%, respectively in 2018, and to stay firm in 2019 due to limited supply and growth of ecommerce.

2) Light refreshment concepts are rapidly expanding in Hong Kong

News

According to a filing with the Hong Kong Stock Exchange, TenRen, B & S International Holdings’ top retail brand, has widened its retail network from 24 to 33 stores in Hong Kong in the financial year (FY) ended 31 March 2018. Driven by their network expansion as well as growing sales in the existing shops, TenRen’s same-store sales grew at a double-digit rate of 13.7% YOY. B & S International plans to expand its TenRen retail network to 41 outlets in FY2019 and 49 outlets in FY2020. According to the company’s website, TenRen ranked first in Hong Kong’s tea drink chain market in revenue terms between November 2016 and October 2017. The total revenue of the company’s retail business jumped from 124.9 million (USD16.1 million) in FY2017 to 196.7 million (USD25.1 million) in FY2018, largely contributing to the company-wide increase in net profit of 22.9% YOY. (Source: InsideRetail, 28 June 2018; hkexnews, 26 June 2018) 

Agency View

Light refreshment is currently one of the fastest expanding retail subsectors in Hong Kong. In addition to well-known tea brands like Comebuy Tea, TenRen's Tea, and Cha Loong which are all expanding in Hong Kong, we witnessed several new Taiwanese tea chain brands recently entering the city, with Causeway Bay being a preferred location for their first shops. New brands such as Tiger Sugar on Jardine’s Bazaar, Milksha on Lee Garden Road and Mr. Tea on Great George Street are among the latest additions in Causeway Bay.

With monthly rental transactions ranging from HKD150,000 - 300,000 (USD19,100 - USD38,200), we see a concentration of outlets in second-tier high-streets in core shopping districts. Some landlords are looking to convert their retail shops into light refreshment outlets, catering to the leasing demand of tea brands to capture Hong Kong’s growing demand for tea concepts.

Research View

According to the latest figures from the Census and Statistics Department, the value of overall F&B receipts grew 10% YOY in Q1 2018. Increasing consumer spending power, backed by a robust labour market and the improving inbound tourism, should drive the demand for light refreshment and tea concepts in Hong Kong over the near term. Given that new tea concepts require smaller shops offering take-away services, the entry-barrier is relatively low which attracts more new brands to the market, leading to fiercer competition. Retailers should focus on product differentiation, a wider product range and optimised customer engagement to stay in the game.

3) Reallocation of residential sites from private to subsidised housing unlikely to tame the property market

News

The government has announced to release five residential plots with an estimated value of HKD28 billion (US3.5 billion) for public tender this quarter. The residential sites include one plot on The Peak – which has some of the highest property prices worldwide, two sites in Kai Tak, and one each in Tuen Mun and Cheung Sha on Lantau Island. The five sites comprise a total development capacity of 1,850 residential units. When combined with the land supply from MTR Corp’s tender for the residential development atop Ho Man Tin station, the total supply of private residential units will amount to 2,750, a 16% decline compared to the previous quarter. The planned land tenders came after the government announced on 29 July new supply measures to ease the housing crisis, including the reallocation of nine government sites originally earmarked for private residential developments, to subsidised housing. Three of the nine government sites are in Kai Tak and six in Anderson Road Quarry can provide 10,600 public flats. (Source: SCMP, 6 July 2018, Lands Department, July 2018)

Valuation View

The Hong Kong government is behind its scheduled target for land supply this year. Furthermore, the reallocation of sites for private residential developments to subsidised housing should pressure the land supply for private housing, which might lead to a further increase of prices for private residential units.

Research View

The Planning Department estimated that Hong Kong will have 230 hectares of residential land lacking by 2046. Chief Executive Carrie Lam Cheng Yuet-ngor has shown her support on reclamation as it can provide over 1,500 hectares of new land, representing 42% of the total 3,600-hectare of land that can be provided by the 18 land supply proposals[1]. However, in the short-term housing shortage should remain. The 10,600 units to be provided by the nine government sites represent less than 1% of total public housing stock, and would have very limited impact on the market. The government needs to continue to allocate more sites for subsidised housing to help young people get on the property ladder amid limited private residential supply.


[1] landforhongkong.hk