1)  Extra land required for housing additional population growth, said Hong Kong 2030 Plus Plan

News 
Hong Kong will need to find – or reclaim – at least 1,200 hectares of extra land to house its growing population and stimulate the economy after 2030. The 2030 Plus planning strategy recommended building two major new towns in the north New Territories and on reclaimed land east of Lantau Island, which would provide 1,720 hectares, to hit that target. The latest official population projection estimated that the city’s population would peak in 2043 at 8.22 million before dropping to 7.81 million by 2064. The blueprint envisaged the city after 2030 as a more livable place with larger flats, more public space for relaxation, a cycling- and pedestrian-friendly transport system, and scenic country parks protected from development. (Source: SCMP, 28 October, 2016)

Agency view 
The HKSAR government has been eager to secure more developable land to accommodate increasing housing demand. The latest revision for the Kai Tak development area prepared by the Planning Department has sought to intensify urban development and increased the population target by 30% with a higher plot ratio and additional land for residential, commercial, and amenity uses. However, any delay in key infrastructure projects could have negative impacts on these objectives.  The delay of the commencement of the Shatin to Central Link to 2019 will further stretch the existing infrastructure capacity to accommodate all the new homes and businesses in Kowloon East in the next two years.

2)  Bigger office transactions continue to fuel a hot investment market

News 
Swire Properties announced the proposed sale of a soon-to-be-completed project Kowloon Bay area for HKD6.5 billion. Swire had purchased the site at Wang Chiu Road and Lam Lee Street in November 2013 for HKD2.64 billion, and has since been at work planning a 555,000 sq ft (51,500 sq m), 22-storey office tower above a 3-storey retail podium. The deal for the Kowloon tower is the latest in a string of high value transactions in Hong Kong as demand for office space and prime assets from mainland companies drives the city’s real estate market to record levels of activity and new price heights. (Source: Mingtiandi, 29 Oct, 2016)

The negotiation for the sales of 75% stake of the Centre, owned by Cheung Kong, is said to be in the final stage. A formal announcement with details is expected in early November. The price should be about HKD35.7 billion for a total 1.22 million sq ft with an average price of HKD29,300 per sq ft. With an expected rental income of HKD70 million per year, the expected yield will be around 2.8%. The buyer is believed to have a PRC background.  (Source: Hong Kong Economic Journal, 30 Oct 2016)

Agency view  
As positive sentiment in the investment market continues to strengthen, we expect to see more large deals being concluded in Q4 2016. During the last week of October, Mingpao has reported that a local investor called Tang Shing Bor acquired the commercial complex and car parking spaces of the Zenith in Wan Chai for approximately HKD560 million, representing a unit rate of approximately HKD19,440 or USD2,505 per sq ft.

Research view  
Hong Kong’s property investment market continues to draw new investment in recent months, perhaps because the unexpected Brexit vote in Europe on 23 June 2016 prompted institutional investors to re-assess their portfolio risk exposure associated with mature and emerging markets. The number of transactions exceeding HKD100 million increased to 58 in Q3, more than Q1 and Q2 combined. Recent Renminbi (RMB) depreciation has also encouraged more inflow of mainland Chinese capital to Hong Kong’s property market. We expect the property investment market will continue to be very active for the rest of 2016.

3)  Number of overseas and mainland Chinese companies with HK business operations continues to grow


News 
The number of business operations in Hong Kong with parent companies overseas and in mainland China climbed to 7,986 in 2016, compared to 7,904 a year ago, according to a joint survey conducted by Invest Hong Kong and the Census and Statistics Department. Results of the “2016 Annual Survey of Companies in Hong Kong Representing Parent Companies Located Outside Hong Kong” show that the 7,986 respondent companies comprised 1,379 operating as regional headquarters (RHQs), 2,352 as regional offices (ROs) and 4,255 as local offices (LOs). In terms of jobs, the number of people engaged by the foreign and mainland Chinese companies (435,000) reached an all-time high, and went up by 3% from 422,000 persons in 2015. In terms of source country/territory, Japan ranked first with 1,376 companies in Hong Kong, followed by the US (1,353), mainland China (1,123), the UK (656), Taiwan (387) and Singapore (382). By sector, import/export trade, wholesale and retail topped the list (3,575), followed by financing and banking (1,520), and professional, business and education services (1,283).  (Source: Hong Kong SAR Government, 26 October 2016)

Agency view 
Given a very tight office market in core locations, affordability remains the talking point with the number of surrender cases consistently coming to market from companies in various sectors. We have seen further evidence of large occupiers looking to take advantage of softening rents in Kowloon East. Notably, there is a market rumour that a multinational personal care company will relocate from Causeway Bay Plaza to Kowloon East, while we have also heard that a professional services firm plans to lease a whole floor at Pioneer Place in Kwun Tong in preference to its current location in North Point on Hong Kong Island. Finally, there is market speculation that a large insurance company is exploring options in the Kwun Tong/Kowloon Bay area for a possible moving from its current office in Causeway Bay. While such relocations will increase vacancy temporarily, we believe that they will have little impact in alleviating rental pressure on Hong Kong Island as the vacant space will probably be filled up again quickly.


Research view  
As the regional economic outlook has stabilised with China achieving a 6.7% GDP growth for Q3 2016, Hong Kong remains a popular destination for overseas companies and mainland Chinese companies. While Q3 Grade A office rent momentum slowed down marginally, office rent will remain at one of the highest levels in the world in 2017, particularly with a strong US currency. However, the Hong Kong office market is developing into a two-tier market. Rent on Hong Kong Island remains firm with very little new supply and steady demand whereas rent for Kowloon faces more downward pressure with new supply and downsizing pressure among trade and sourcing industries.

4)  Housing price keep rising and getting closer to previous record high

Research view  
Smaller sized apartments are getting popular with increasing price tags in Hong Kong Island and the MTR extension helping to push rent and price higher in Hung Hom. With the newly finished Whampoa Station, it only takes 15 minutes to travel between Admiralty and Whampoa Garden, which is the largest residential estate in Hong Kong, with 88 blocks and over 10,500 units with a full range of amenities. Prices and rentals have gone up 5-10% due to strong interest following the new MTR extension. Looking forward, more developers are planning for the leasing of fully/half furnished apartment buildings in convenient locations, for example, Star Studios I & II in Wan Chai by Swire Properties, a new apartment building in Happy Valley by Emperor Group, and a building at No. 17 Shau Kei Wan Road by a local developer. All these buildings offer smaller studio-sized apartments with convenient transport services.

Agency view  
The recent price increase shows that local buyers have regained confidence in the market and suggests that more capital is flowing into the Hong Kong residential market as the RMB continues to devalue and mainland authorities introduces new property buying curbs in first and second tier cities. We predict luxury home prices will remain more or less flat over 2016, with mass residential prices showing low single-digit growth. However, the prospect for a downward price correction remains with the potential for interest rate increases from December onwards and an ample pipeline of new apartment supply.

ansion from 2H 2017


3)  Office yields likely to be stable over 2016, with expansion from 2H 2017

Agency view (Strata-titled Sales)
In the past week, 4/F at No.9 Queen’s Road Central was sold for HKD370 (USD47) million, or a unit price of HKD 27,000 (USD3,462) per sq ft, with sales and lease back condition. Sales activity of strata-titled offices should remain steady is the near term.

Research View
We expect Hong Kong office property yields to stay at about 3% over most of 2016, and only to start expanding once US interest rates start rising sharply. Despite deteriorating business confidence, we believe capital values in office property will hold up well for two reasons. The first explanation is that real interest rates in Hong Kong (currently about -2%) will stay negative for some time yet, since interest rates in the US – which Hong Kong rates follow closely as a result of the currency peg – look set to rise gradually rather than rapidly. The second reason is the simple fact that too much capital is chasing too little stock in the Hong Kong office property market. However, we expect office sector capital values to start declining in 2H 2017, by which time real interest rates should have returned to positive territory. This change should cause office property yields to start expanding.

Agency view (Strata-titled Sales)
In the past week, 4/F at No.9 Queen’s Road Central was sold for HKD370 (USD47) million, or a unit price of HKD 27,000 (USD3,462) per sq ft, with sales and lease back condition. Sales activity of strata-titled offices should remain steady is the near term.

Research View
We expect Hong Kong office property yields to stay at about 3% over most of 2016, and only to start expanding once US interest rates start rising sharply. Despite deteriorating business confidence, we believe capital values in office property will hold up well for two reasons. The first explanation is that real interest rates in Hong Kong (currently about -2%) will stay negative for some time yet, since interest rates in the US – which Hong Kong rates follow closely as a result of the currency peg – look set to rise gradually rather than rapidly. The second reason is the simple fact that too much capital is chasing too little stock in the Hong Kong office property market. However, we expect office sector capital values to start declining in 2H 2017, by which time real interest rates should have returned to positive territory. This change should cause office property yields to start expanding.