1) Subdividing large apartment units for the emerging “co-living” concept
Eton Properties has refurbished the existing layout of Woodland Villa, a luxury apartment in Shouson Hill completed in 1990, to integrate the “co-living” concept, dividing the existing 18 units ranging from 944 sq ft (88 sq m) to 1,661 sq ft (154 sq m) into 270 units with size between 80 sq ft (7 sq m) and 200 sq ft (19 sq m). The co-living space will provide a shared living room with private rooms equipped with elevated beds and private toilets. Smaller units will offer lower rents to the tenants, ranging from HKD8,500 (USD1,090) to 20,000 (USD2,564) per month, compared to an average monthly rent of HKD60,000 for a traditional luxury unit under the same roof, despite the unit rate increasing from HKD64 (USD8) to HKD100 (USD13) per sq ft per month. (Source: HKET, 26 July 2017)
With leasing demand shifting to the middle segment of the luxury market due to increasing rents, dividing large units into smaller units would allow landlords to raise the monthly rent as smaller units are more affordable and allow landlords to attract the larger group of tenants in the luxury market. The demand for smaller units has also been supported by smaller household size. According to Census and Statistics Department, the average household size has decreased from 3.3 to 2.8 people in 20 years. With space becoming scarcer, the co-living trend should emerge while the co-working concept has become mature.
2) Proposed development plans for Kwun Tong to provide 0.9 million sq ft of commercial space
The government has announced the two proposed development plans for the Action Area of Kwun Tong. The 4.2 hectare of site area under the two plans will provide a total gross floor area of 967,683 sq ft (89,900 sq m) or 973,604 sq ft (90,450 sq m) for commercial and cultural development. The gross floor areas for office and retail development will be the same in the two proposals, 702,889 sq ft (65,300 sq m) and 156,078 sq ft (14,505 sq m), respectively. Under the plans, the commercial portions will comprise either three commercial buildings of 59-99 metres tall or two commercial buildings of 100 metres tall given the gross floor area to be the same in both plans. (Source: HKET, 28 July 2017)
Hosting 6.9 million sq ft (0.6 million sq m) of Grade A office space, Kwun Tong is currently the second largest office submarket in Hong Kong. It is set to be the largest office supply market with a net floor area of 3.8 million sq ft (0.4 million sq m) of new office space to be completed in 2017-2021. In addition, Kwun Tong has benefited from improving amenities and infrastructure thanks to the government’s initiative of transforming Kowloon East into Hong Kong’s CBD2. The government has undertaken three stages of a feasibility study on Kowloon East’s pedestrian environment and proposed 27 short-term improvement measures. Despite a large amount of supply, the gentrification of Kwun Tong should continue to attract the relocation demand from cost-conscious occupiers.
3) A modest retail outlook despite declining rents from lease renewals
It has been reported that Prince Jewellery & Watch will renew its triplex corner shop at 16 Kai Chiu Road in Causeway Bay at a 63% rental discount compared to its previous lease. The 3,400 sq ft (316 sq m) shop was leased for HKD3.0 million (USD387,000) per month during the market peak in 2014, but has been renewed for another two years at a monthly rent of HKD1.1 million (USD141,026). The company has reduced its footprint in Causeway Bay, leasing two shops in the district, compared to four shops in 2014. Its other shop at Russell Street leased at a monthly rent of HKD2.9 million (USD269,419) will expire this year. (Source: HKET, 13, 28 July 2017)
Given an ongoing revenue decline, jewellery chain operators generally remain cost-conscious, while pursuing different leasing strategies to remain flexible and control operating cost. While some operators are vacating shops in prime locations, others including Chow Sang Sang and 3D-GOLD Jewellery for instance are trading on holdover lease terms via monthly tenure on Haiphong Road and Nathan Road, respectively.
Following a rebound in tourism numbers which has been supported by strong economic figures in mainland China and by the recovery in the Chinese renminbi, the Hong Kong retail sector in general has started to pick up. Moreover, sales declines have halted in the jewellery, watches, clocks and valuable gifts segment of the retail market, where retail sales value increased by 0.8% YOY in April and May combined and by 1.3% YOY over the first five months of 2017. There have been other signs of recovery in sales of luxury goods. For example, a local jewellery group, On 27th July, Emperor Watch & Jewellery, announced a Positive Profit Alert on the Hong Kong Stock Exchange, expecting to record a net profit for H1 2017 compared to a net loss for H1 2016. Meanwhile, another large local jewellery enterprise, Luk Fook Holdings, announced on 19th July that Q2’s same store sales growth for Hong Kong and Macau had increased 3% YOY, accelerating from a 1% YOY growth in Q1 2017. Despite the modest outlook for retail sales, there are leases of shops expiring by late 2017 and early 2018 where rents have not yet been adjusted. We expect high-street shop rents to remain under pressure over H2, and predict a drop of 5% by year-end 2017. However, H2 2017 should be the bottom, and we expect retail rents to rise over 2018. (Source: HKEXnews, 19, 27 July 2017