01 June 2017
1) Hong Kong’s banks raise mortgage rates, after HKMA tightened risk rules
HSBC, Standard Chartered, Bank of China (Hong Kong) and Hang Seng Bank raised their mortgage rates to HIBOR plus 1.4% following last week’s move by HKMA to tighten borrowing rules and loans limits in a surging real estate market. HKMA introduced new regulations which stated that banks must allocate a larger risk weighting towards their assessment of creditworthiness, while cutting the amount of allowable loans on residential and commercial properties. However, the tighter restrictions seem to have had little effect on home buyers so far. (Source: SCMP, 27 May 2017)
The new measures can definitely reduce the banks’ lending capacity; however, they will make it more difficult for buyers to purchase new homes. There will be little impact on cash-rich individuals while the new rules are very tough for potential first-hand home buyers. First-hand buyers may go for small or mini flats with less down payment required. We expect flats requiring smaller lump-sum payment and mini-sized flats will dominate the market in the coming months and their unit price will increase faster than larger size units.
The HIBOR-linked mortgage rate has been stable in the last few months amid rising interest rate in the US since November 2016. As this round of rate increases has been driven by a tightening of regulations by the HKMA, we expect that its impact on prices will be minimal with a mere 10bp increase. Given a brighter economic outlook following strong Q1 GDP growth and almost full employment in Hong Kong, we expect housing prices will continue to rise modestly for the rest of 2017. We shall closely watch the market liquidity as the rising interest rate cycle will continue into 2018, which could prompt the HIBOR and the housing mortgage rate to increase further.
2) Strong PRC firms demand pushing large occupiers to relocate from Central
PRC firms have been expanding their footprints in Central. Industrial Bank, a Chinese commercial bank, leased about 34,000 sq ft (3,158 sq m) in Three Garden Road in Central with a monthly rent of HKD3.7 million (USD0.48 million) or HKD110 (USD14) per sq ft, following CMB International, another Chinese commercial bank who recently leased two floors in the same building. However, non-PRC banks are instead looking for opportunities outside Central due to soaring rents. Cathay United Bank, a Taiwan bank, leased about 17,000 sq ft (1,579 sq m) at Lee Garden Three in Causeway Bay with a monthly rent of HKD1.1 million (USD141,940) or HKD65 (USD8.4) per sq ft, relocating from LHT Tower in Central. Market rumours suggest that two other Taiwan banks - Bank of Taiwan and SinoPac Financial Holdings - are also under negotiation with the landlord of Lee Garden Three and looking for opportunity to relocate their offices from Central. (Source: Hong Kong Economic Times, 29 May 2017)
The growing trend of movement out of Central has been triggered by the ever-rising Central rents driven by the expansion of PRC firms. New Grade A office buildings on Hong Kong Island outside Central provide an option for occupiers looking for a cost-saving solution without downgrading their office requirements. Due to greater proximity to clients and for talent retention purpose, companies in Central prefer to maintain their operations on Hong Kong Island when considering their next office locations. Despite the fact that Hong Kong Island will have over 3.0 million sq ft (278,700 sq m) of new Grade A office space from 2017 to 2020, new quality buildings should be quickly filled by this relocation demand from Central. We maintain our positive outlook for Grade A office rents across the Island over the coming three years.
3) Hong Kong developers win back market share in recent land sales
A consortium led by Sino Land has won the development rights for a residential project at West Rail’s Kam Sheung Road station in Yuen Long with an upfront lump sum payment of HKD8.33 billion (USD1.07 billion), which is at the high end of the market expectations. This is the third sale of government land this month that has broken the domination by mainland Chinese developers, reversing the previous trend whereby Chinese developers had overwhelmed property sales and broken one price record after another. Mainland Chinese developers appear to be taking a break from their shopping spree for Hong Kong assets. For the latest Kai Tak commercial site tender, Shimao Property Holding and Chinese Overseas Land & Investment were the only two mainland Chinese developers submitting bids. (Source: SCMP, 26 May 2017)
The lack of strong competition from mainland Chinese developers in the recent land sales has been a surprise to the market as Chinese developers have been actively purchasing office buildings and residential development sites in Hong Kong. Based on the recent transactions, we could say that Chinese developers are more interested in larger residential sites in prime urban core areas, such as Kai Tak, than in more remote development areas and new towns. Commercial sites are also less attractive as it will take more effort for Chinese developers to build office properties and manage their own tenants.