1) Another increase in interest rates may be possible later this year
The US Federal Reserve upgraded its assessment of the US economy on 27 July, saying that near-term economic risks had diminished and that the recovery in the job market had regained momentum. (Source: Financial Times, Bloomberg and others, 28 July 2016)
This change of stance suggests that another increase in US interest rates may be possible later this year. Surprisingly, on the day the US dollar gave up early trading gains after this news, while the ten year government bond yield (which would normally rise in response to hints of higher rates) fell over the day to close at just below 1.50%. Certain observers explain this market reaction by pointing out that, while the job market appears to be strengthening, the outlook for US inflation remains very subdued, giving the Fed scope to avoid raising interest rates after all.
However that may be, we perhaps need to add a qualification to our assumption that real interest rates in Hong Kong will stay negative till 2H 2018, to the benefit of all segments of the property market. While this assumption still seems reasonable, we acknowledge that accelerating US growth is a potential risk to our core scenario, since this would result in stronger and faster upward pressure on US and therefore Hong Kong interest rates than we presently assume.
The other key risk to our core scenario of a "soft landing" for HK property is a sharp economic deceleration or even a financial crisis in mainland China. However, the probability of such a negative outcome seems to have diminished.
2) Virtual Reality will accelerate online activities and promote personalised shopping in the near future
Valuation and Advisory Services view
The online retail market in Hong Kong is relatively small compared to the US as less than 5% of total retail revenue is generated online whereas more than 20% of retail sales are generated on-line in the States. We expect that the rapid development of Augmented Reality/ Virtual Reality, Big Data Applications and Artificial Intelligence will accelerate the online shopping activities and promote personalised shopping experience in the near future. For instance, Rebecca Minkoff offers interactive Mirrors and Tommy Hilfiger offers VR fitting room. Brands like Coach and Toys'R Us are also working closely with the mobile app developer, Tulip, to enhance the personalised shopping experience online and offline for their customers..
3) Luxury fashion brands offices under pressure
There have been rumours and speculation about additional surrendered spaces that may be released on to the market – mostly offices in the central areas. These surrendered spaces supposedly have a few things in common: they are in the mid-and-large size of around 8,000 to 10,000 sq ft, and in addition they are mostly offices of luxury fashion brands. These rumours may have their origin in the widely reported news (see, for example, the article in the SCMP of 26 July) that the French luxury goods giant LVMH which is giving up on one of its fashion labels, DKNY, and selling it to Calvin Klein. If the trend of surrendering of space by retail offices is prolonged, we foresee that the landlords of some of the buildings in traditional commercial areas (e.g. Kowloon) may make use of their geographical advantage and perhaps change the usage of their space and target to lease them to users other than traditional office tenants in order to maximise asset appreciation and rental revenue.
We believe Wong Chuk Hang will be an interesting area for office development in Hong Kong, driven by increased Grade A office supply in the district and improving transport connectivity, with the scheduled completion of MTR South Island Line East at the end of this year. Over time, the area may well develop into an office market for international retailers, artist and creative industries, architectural and design firms, as well as the back offices of global companies and professional firms. The neighbourhood should become more attractive to corporate occupiers as the portfolio of offices, retail, hotels and serviced apartments improves.