1)  Despite the negative industry outlook, mid-price retail brands are looking for expansion in prime locations

News 
Retail sales plunged 10.5%year-on-year in August due to dwindling visitor numbers – the steepest decline since February – and the industry faces an uncertain outlook ahead of a tax cut on cosmetics products on the mainland. The poor figure for August, which marked the 18th consecutive monthly contraction, dampened hopes raised in July when retail sales saw a narrower year-on-year decline of 7.7%. At the same time, following an announcement across the border in China, the present 30% tax on cosmetic products will be waived entirely for non-luxury products and cut to 15% for luxury items. More mainland consumers are likely to buy cosmetics at home instead of travelling to Hong Kong for them as the price gap narrows. Cosmetics and medicine sales make up roughly 10% of total retail sales in Hong Kong. (Source: SCMP, 30 September 2016)

Agency view 
Despite the negative outlook and fall in visitor spending on big-ticket items, mid-price brands have increased their footprint in Hong Kong. For example, fast fashion brands have been expanding in prime shopping districts:
  • Forever 21 has opened its second store, a new three level store of 19,000 sq ft, in Mong Kok 
  • Monki (street-style-meets-Scandi-chic design brand under H&M) has opened its fourth standalone store at Windsor House, Causeway Bay 
  • The French sportswear brand Lacoste has taken over the space at the ONE in Tsim Sha Tsui which was previously occupied by a luxury watch brand
Paradise Mall, the neighbourhood mall at Heng Fa Chuen owned by MTR, has recently opened a newly renovated sports section (around 43,000 sq ft), consisting of over 30 sports brands, including the biggest Nike factory outlet and the only Under Armour outlet in Hong Kong.

Research view 
We expect that the impact of declining tourist spending on the local retail industry will start to diminish after 18 months of consecutive decreases. The retail industry is adjusting to the changing market conditions, exploring new business models, and tailoring its services more to the local population. With falling rent in prime locations, mid-price brands of fast fashion, activewear, affordable luxury, cosmetics and beauty brands as well as new F&B concepts have become more active in looking for prime retail space.


2)  Expatriates moving to new neighbourhoods with slashed housing budget

News 
A big drop in rents in some Hong Kong neighbourhoods appears to be a further indication of the downturn in the city’s finance sector, and another possible sign that expatriates are on the move. Recent downsizing announcements by major financial institutes indicate that the trend will continue for a while. The Immigration Department has reported a 10.6% drop from 2015 in British expatriate residents, and smaller reductions in the number of Americans and Australians. Expatriates in general have also been seeing rental budgets slashed by employers, with more than one-half of all rental allowances less than HK$30,000 per month. (Source: SCMP, 29 September 2016)

Agency view 
Affected by the downturn in the global economy, housing spending by expatriates in Hong Kong has seen a significant drop. With increasing demand for the lower-budget properties, we see the rental market for expatriates moving in two different directions:
  • The mass rental market in the range of HKD20,000-50,000 per month has seen increasing demand and rents have risen 5-8% this year
  • The high-end luxury rental market (over HKD150,000 per month) has seen a drop of 5-8% 
This has resulted in a shifting of popular expatriate living neighbourhoods from traditional prestige areas like Repulse Bay, Stanley and Discovery Bay to West Kowloon, and West Hong Kong Island areas like Kennedy Town, Sai Ying Pun and Sheung Wan. A number of expatriates are also starting to consider living in North Point where there are new buildings with modern, good-quality finishes but in a lower rental range.


Research view  
Luxury residential rents are likely to continue to face downward pressure: our rental index for the luxury residential market has fallen 4.8% so far this year. With global banks and investment banks now under significant pressure to reduce costs and headcounts, expatriate arrivals working for non-financial companies will remain the key contributors to the luxury leasing market. The residential leasing market will experience a downturn this year and we predict that luxury rents will slide 5.0%-5.5% in 2016 after 9.8% growth in 2015. However, the recent recovery in the Hang Seng index (see comment below), should it persist, may afford some respite in luxury rents. 


3)  Recovery in Hong Kong stock market may support residential property prices

News 
Hong Kong's Hang Seng equity index increased 13.5% over Q3 2016, recording its best performance in about seven years and outstripping all other major Asian equity markets over the quarter. (Source: Bloomberg, 30 September 2016)


Research view  
Stock price increases help boost the wealth effect which encourages investment in other assets, especially property. The recovery in the Hang Seng index, should it persist, ought to encourage investment in Hong Kong residential property, and so suggests that the pick-up in residential prices seen in recent months may continue in the near term. This “feel good” factor may conceivably spill over into the residential leasing market too.


4)  MTR extension should improve Hung Hom’s appeal as an office node

News 
Long-awaited new MTR stations at Ho Man Tin and Whampoa in Kowloon are set to start operating on 23 October. The HKD7.2 billion, 2.6km extension, originally scheduled to open in August last year, will run from Yau Ma Tei to Whampoa, the line’s new terminus, with one station in between at Ho Man Tin which will eventually serve as an interchange station for the Sha Tin to Central link. The two new stations will be able to cope with 146,000 residents and help ease traffic congestion and reduced direct travel times (Source: SCMP, 21 September 2016)

Agency view 

This is good news for tenants in the market, hence multiple tenants are now undergoing negotiations in the old portions of Harbourfront Towers as well as the new extension floors on top of Tower 1, named The APEX. The rental we foresee will not have significant impact at this stage as there has been very mild office take-up throughout the past two quarters in 2016 with most transactions being tenancy renewals. Although we are seeing the expansion of office spaces in Whampoa and the Hung Hom districts, this area is unlikely to be viewed as a commercial district as it is surrounded by schools and residential complexes.  However, with improved transport infrastructure, the area ought to draw more interest from potential tenants.

Research view  
We have seen the positive changes that new MTR stations could bring to a community in the past, the most recent example being the Kennedy Town area following the completion of the Hong Kong Island line at the end of 2014. Office rents in Sheung Wan picked up faster than the general market in 2015, benefiting from the improved connectivity provided by the new line and stations. We believe the new MTR stations in Hung Hom will have a positive impact on the local office market, especially for companies interested in decentralised locations. The recent acquisition of the One Harbour Gate development by mainland Chinese companies also highlights the area’s upside potential.

 

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.