05 April 2017
1) Moderate pace of economic growth in the US is good for Hong Kong property market
The US economy is on track to expand at a 0.9% annualised pace in the first quarter following the release of data on consumer spending and income in February, as shown by the Atlanta Federal Reserve's GDP Now forecast model on Friday. The latest first-quarter gross domestic product estimate was slower than the 1.0% growth rate calculated on March 24, the Atlanta Fed said on its website. The Atlanta Fed said its latest forecast on first-quarter real consumer spending growth fell from 1.4% to 0.8%. (Source: Reuters, 31 March 2017)
Strong economic growth, a tight labour market, and higher inflation have been the main reasons for the two interest rate increases by the US Federal Reserve since December 2016. Most forecasters predict three 0.25% interest rate increases for 2017 with more to come in 2018. However, if the pace of US economic growth remains moderate, the Federal Reserve may slow down the pace of interest rate hikes. This prospect has positive implications for property assets in Hong Kong. Hong Kong has enjoyed negative real (i.e. inflation-adjusted) interest rates since late 2009. On the assumption that US interest rates only increase gradually and that inflation rate in Hong Kong stays constant, we do not expect Hong Kong to return to positive real interest rates before H2 2018. This outcome should support capital values across most segments of the Hong Kong property market.
2) Tenants are looking for ways to keep office rental costs in check in a tight market
According to the preliminary findings in Hong Kong Property Review 2017, published by the government’s Rating & Valuation Department, more Grade A office supply will come on stream in 2017 with 2.69 million sq ft (250,000 sq m). New Grade A office supply in Kwun Tong will account for 54% of the anticipated supply. The new supply of Grade A office will drop by 60% to 1.11 million sq ft (103,000 sq m) in 2018 with the majority from Island East. (Source: Rating & Valuation Department, 24 March 2017)
Whilst a number of occupiers are able to consider relocation to cost-saving districts such as Quarry Bay, Wong Chuk Hang and Kowloon East, others remain rooted in core districts by the need to maintain close proximity to their client base. These occupiers are instead considering making changes to how their workspace is used, seeking increased efficiency, a reduced footprint, and a more innovative and inviting working environment. For larger occupiers spread over multiple locations, consolidation also offers the opportunity to drastically reduce footprint and increase efficiency. Re-stacking existing office space often requires swing-space for temporary use during renovations – Hong Kong’s growing co-working sector comes into play here, offering fully fitted and furnished space with flexible lease terms, as well as the opportunity for users to network and collaborate.
Since the start of the year, 150,000 sq ft (14,000 sq m) of office space in Central has been secured by PRC companies, which represents approximately 40% of the total amount leased by PRC companies in 2016. Rent in Central has increased by 3.4% in since March 2016 while the overall Hong Kong office rent has only increased by 1.3%. We expect Grade A office rent on Hong Kong Island to increase by 4% in 2017 due to steady demand, particularly from PRC companies with a strong preference for Central. On the other hand, we foresee negative growth for Kowloon office rent in 2017 due to a large new supply pipeline in Kwun Tong.
3) Luxury residential rents picking up since the end of 2016
The Rates and Valuation Department recently announced the third consecutive monthly increase of the private domestic rent index to 175.8 for February 2017, the highest since October 2015. The index has risen by 7.3% in the last 12 months. During the same period, the index for mass market leasing has increased by 7.8% while the luxury leasing market has only increased by 0.5%. However, the luxury leasing market index has increased at a faster rate since the last quarter of 2016, with an increase of 1.1%. (Source: Rates & Valuation Department 31 March 2017)
The luxury leasing market becomes active following the start of international schools placements. A number of luxury apartments and houses which have been vacant for months have recently been leased. For instance, a garden duplex at Henredon Court and two houses at 63 Deep Water Bay Road have just been rented out.
The luxury residential rent growth has been lagging the mass market growth since 2015 due to corporate downsizing and reduction of housing allowance for expatriate staff in many of the leading finance institutes and MNCs. In our latest breakfast series, we were informed by HR directors from different corporates that while the budget for expatriate housing has stabilised, many have switched from a corporate package to a personal one to further cut cost. Hence, we expect the rent for luxury residential market will continue to trail behind the overall market in 2017.