1) Enshrinement of 'Belt and Road' in Chinese Communist Party Charter is a boost for Hong Kong office market

News

Chinese President Xi Jinping’s vast “Belt and Road” infrastructure project was included in the ruling Communist Party’s constitution last Tuesday, giving it greater policy heft and added pressure to succeed. The party’s amended charter, approved at the close of its twice-a-decade congress, pledged to “pursue the Belt and Road initiative”, evidence that the ambitious “Silk Road”-like initiative will endure beyond Xi’s tenure. (Source: Reuters, 24 October 2017)

Agency View 

The 19th National Congress of the Communist Party of China has delivered a clear message regarding China’s position in the world economy. Many PRC clients have re-activated their real estate projects in Hong Kong, which were previously on hold or idled. We expect financial PRC clients to remain a dominant player in Grade A office leases in Central. In addition, non-financial PRC occupiers may consider locations other than core Central, to lease quality office space with decent specifications. This will further drive demand for premium office space in other districts in the coming years.

Research View 

Demand from mainland Chinese firms has continued to contribute to the low vacancy in Central with large banks expanding their footprint. We expect Chinese national initiatives such as the Belt and Road project to support demand from mainland China, with new demand likely to arise predominantly from smaller or non-financial Chinese firms, at the same time benefiting the growth of existing mid-tier professional services firms in Hong Kong. These firms will support the rental outlook for offices in other districts across Hong Kong Island given their lower budget compared to large banks located in Central.


2) Local developers are eyeing URA tenders to replenish their land bank

News

Southwater Ltd., a consortium of the Hong Kong-listed developers Wing Tai Properties Ltd. and CSI Properties Ltd., has won the tender to redevelop the Urban Renewal Authority’s (URA) Peel Street/ Graham Street project (Site C) in Central, outbidding eight other developers, including the large local developers CK Asset Holdings, Sun Hung Kai Properties, New World Development and Henderson Land. The consortium has agreed to pay a reported total consideration of HKD11.6 bn (USD1.49 bn), translating into an accommodation value of HKD26,728 (USD3,425) per sq ft. URA had received a total of nine tenders by the closing date, after inviting 27 qualified property developers/ consortia. The project is divided into sites A, B and C, which will be implemented in phases. Once completed, Site C - covering about 28,901 sq ft (2,685 sq m), is planned to provide a GFA of around 434,000 sq ft (40,320 sq m) for hotel, office and retail use as well as public open space spanning an area of at least 14,100 sq ft (1,310 sq m). (Source: Mingtiandi, 25 October 2017; Urban Renewal Authority,  05 September and 24 October 2017)

Image: Urban Renewal Authority

Research View

According to the tender records from the Lands Department, the URA and the MTR Corporation in 2016 and 2017, all tenders for commercial sites were won by local developers. In contrast, Chinese developers have dominated this year’s residential tenders, accounting for 68% (3,374,600 sq ft or 313,600 sq metres) of the developable GFA of residential sites sales, compared to 38% (4,775,800 sq ft or 443,850 sq metres) in 2016. However, Chinese developers have not been actively bidding for URA projects, as those developments provide less planning flexibility than sites sold by the Lands Department; in addition, the developments are subject to a sales revenue split with the URA. We expect URA projects to remain popular among local developers amid intense competition in government land tenders due to the participation of Chinese developers. (Source: Lands Department; Urban Renewal Authority, MTR Corporation)


3) Space Sharing Scheme for Youth breathes new life to industrial properties

News

In the Space Sharing Scheme for Youth press conference last week, it was announced that about 89,139 sq ft (8,281 sq m) of industrial and commercial space, located in Wong Chuk Hang, Wan Chai, Kwun Tong, Tsuen Wan and Lai Chi Kok, will be provided by 10 landlords; such as Sun Hung Kai Properties, Laws Group, Sino Group, Emperor Group and Stan Group. Five non-government organisations, including Po Leung Kuk, Cyberport Management Company and the Arts Development Council will operate spaces while others will be self-run. Rent for operators is not to exceed 30% of the market rent, while rent for users will be capped at 50% of the market rate. The first batch will open for application in H1 2018 and the second batch is expected to be launched between 2018 and 2019. The scheme aims at helping young people to launch their business, innovation and technology start-ups, creative industries and arts and culture-related works. (Source: SCMP, 30 October 2017)

Research View

Given that the rent for users will be no more than 50% of the market rent, it provides start-ups the benefit of lowering their operating expenses, especially those with less capital, which is likely to attract a lot of young entrepreneurs to start their businesses. Large coworking space operators, such as WeWork, Paperclip and Naked Hub are unlikely to be affected as their tenant base is extensive, ranging from start-ups to multinational companies (MNCs).

In the press conference, the government also mentioned a potential arrangement about the land premium for the second batch of revitalisation projects to encourage developers and owners to offer coworking space for innovation and creative industries. The scheme will allow more developers to experience the operation of coworking space within their portfolios, thus encouraging cooperation between developers and coworking operators.