1)  Currency movements prolong pressure on retail property sector


News
In the aftermath of Brexit, investors appear to have been moving to hold perceived “safe haven” currencies. Consequently, the Chinese renminbi has weakened further against the US dollar, and now stands at a five-year low of 6.66. Conversely, the Japanese yen has continued to strengthen against the US dollar, and now stands at 102.5, compared to the two-year average of 115.8 and close to its two-year high. (Sources: various)

Research view 
The Hong Kong dollar is pegged to the US dollar, meaning that the Chinese renminbi has been weakening further against the Hong Kong dollar too, while the Japanese yen has been strengthening. Continuing renminbi weakness is likely to put further pressure on Chinese tourist arrivals in Hong Kong, with adverse implications for retailers’ revenues and therefore for rents and capital values in the retail property sector. Yen strength is also a modest negative for the sector. This is because Japanese goods are popular in Hong Kong, and the cost of sourcing products in Japan is rising for Hong Kong retailers.
 

2)  Further to Brexit, office occupiers’ decision-making processes are lengthier


Agency view (Hong Kong Office Services)
Brexit has resulted in significant market volatility over the past week. While Asia is likely to remain relatively unscathed, concerns prevail about a contagion effect globally, and western corporates remain cautious towards decision-making processes. We have seen no immediate impact on the office leasing market in Hong Kong; however, we are likely to see further downsizing from European corporates, and a potential softening in the market if global sentiment remains weak. Decision-making process are likely to take longer and require further due diligence in order to justify any significant capital expenses. On the other hand, landlords remain optimistic in view of the limited new supply, tight vacancy conditions and sustainable increasing demand from mainland Chinese corporates. In summary, we are unlikely to see any immediate effects of this volatility in the Hong Kong office leasing market.

Agency view (Kowloon Office Services)
Further to Brexit that happened last Friday, occupiers have become very cautious about their office planning with major tenants deciding to remain the status quo. In the Kowloon sub-market where the majority of tenants are in the sourcing business, we will be seeing more emphasis on cost savings. These companies are expected to be reacting more quickly in comparison to the past quarters due to the currency exchange fluctuations. Import and export will have direct impact and we expect an increasing number of surrendered spaces from these sourcing companies. In contrast, we predict rents in Grade A offices to remain strong due to increasing demand from financial-related companies.

3)  79/F at The Centre fetched record-breaking price of HKD37,800 per sq ft

Agency Agency view (Capital Markets and Investment Services)
The week ending June 30th saw a notable sales transaction, in which the top floor (79/F) at The Centre, located at 99 Queen’s Road Central, was sold for HKD500 (USD64) million, or HKD37,800 (USD4,846) per sq ft. This deal breaks the previous record high and represents the most expensive office floor in Hong Kong on a per square foot basis. Available stock at The Centre has always been limited as the majority of the building is still held by Cheung Kong. There are only eight co-owners in total within the Centre, some of which are owner occupiers such as DBS Bank.

Research view
If you an investor sitting on substantial liquid assets, placing money in core assets in mature markets such as the office property sector in Hong Kong remains a relatively safe bet. We do not believe Brexit will have a significant adverse impact on inbound investment in the Asia Pacific region. On the contrary, we think that Brexit may well boost confidence in the region and so help support inbound investment.

4)  NWS Kwai Chung Logistics Centre transacted at HKD3.75 billion

Valuation and Advisory Services view
On 20 June 2016, NWS Holdings Limited entered into the Sale and Purchase Agreement with China Resources in respect of the disposal of NWS Kwai Chung Logistics Centre with a consideration of HKD3.75 (USD0.48) billion. The gain arising from the Disposal will be recognized by means of a fair value gain of approximately HKD850 (USD109) million in the financial year ending 30 June 2016 according to their circular announcement.

NWS Kwai Chung Logistics Centre became Hong Kong’s most expensive logistics building on a per square foot basis at HKD4,019 (USD515) based on a lettable floor area of 933,000 sq ft. In Q4 2015, the transacted price of Cargo Consolidation Complex, a data centre owned by Goodman, fetched HKD5,300 (USD679) per sq ft based on lettable floor area. Considering the large rental gap between data centre and logistics, the unit rate of NWS Kwai Chung Logistics Centre is significantly higher than market’s expectations. General speaking, we believe the logistics market will continue to be supported by long term investors despite the weakening global economy.

 

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.


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.