05 July 2017
1) Wong Chuk Hang offices lure consolidation demand
Wong Chuk Hang continues to capture the consolidation demand from insurance companies. AXA has leased 14 floors or about 98,000 sq ft (9,110 sq m) in a new Grade A building at 38 Wong Chuk Hang Road with a monthly rent of HKD2.2 million or HKD22 (USD2.8) per sq ft. By leasing over 50% of the total floor area of the premises, AXA has gained the naming right of the building and will rename the building as “AXA Southside”. The company leased the new premises to consolidate its operations in multiple locations under one roof. (Source: Hong Kong Economic Times, 29 June 2017)
The high rent environment in Central and Admiralty in particular is forcing numerous occupiers to consider more cost- effective locations and to reconsider the way in which they operate. We are seeing more occupiers undertake workplace studies on how to maximise productivity and use office space more efficiently – reducing the leased area and simultaneously reducing overall rental costs. The insurance sector, in particular, has considered various strategies which often involve space consolidation and the incorporation of flexible workspace.
The completion of the South Island Line in December 2016 has significantly increased the attractiveness of Wong Chuk Hang. Grade A office rents in the district have increased 3.5% year-to-date while the vacancy rate has decreased from over 30% to 15% over the same period. Given that the vacancy rate of Hong Kong Island remains low at 2.4%, and that the vacancy rate in another decentralised area, Island East, is below 2%, Wong Chuk Hang enjoys a competitive advantage in providing sufficient space for consolidation and cost savings for tenants who would like to relocate within Hong Kong Island. A mid-sized floor plate ranging between 10,000 and 15,000 sq ft (930-1,395 sq m) has proved to be popular among professionals and SMEs.
2) Positive retail sales have yet to impact retail rents in prime districts
Hong Kong retail spending has grown for the third straight month after two years of decline. Retail spending has grown by 0.5% (+0.1% in April) and reached HKD35.9 billion (USD4.6 billion) in May. The reasons were stronger inbound tourism (+1.8% and +1.9% in April YOY for mainland Chinese visitors) and local demand. Despite the growth throughout Q2 2017, the total sales figures of first five months represent a 1% decrease compared to the same period last year. The biggest winners were the Chinese drugs and herbs sector and the vehicles and parts sector which jumped 10.4% and 8.3% YOY, respectively. Also, jewellery and watches rose by 1.4% YOY. However, electronic goods and photographic equipment, as well as durable goods, were down by 14% and 12.1% YOY, respectively. Further improvements, especially in H2, are expected, with tourism and local consumption sentiment as growth drivers. (Source: SCMP, 29 June 2017)
Despite rising interest rates, we have noticed more activity in the retail investment market in Q2 2017. Over the week, CR Land acquired a commercial building on Sugar Street in Causeway Bay for a reported consideration of HKD1.68 billion with a total developable GFA of 62,440 sq ft (8,005 sq m), translating into an accommodation value of HKD27,000 (USD3,460) per sq ft. It has the potential to be developed into new vertical retail premises. Another market transaction recorded was the acquisition of the retail podium (G/F to 2/F) of Comfort Building at 86-88 Nathan Road in TST for a reported consideration of HKD760 million (USD97 million) by an individual investor.
The positive development in the retail market following the return of Chinese tourists to Hong Kong has yet to translate into higher retail rent. With the spending pattern of Chinese tourists changing, the combined sales of luxury goods and electronics are still weak. We expect rent of high street shops will remain under pressure for the rest of 2017 but see a moderate uptick in 2018. However, the lower rent offers opportunities for new brands to establish a presence in prime retail districts.
3) Hong Kong home prices rise tapering off as government policies show teeth
Four weeks after the HKMA introduced policies to tighten mortgage rules, the increase in home prices has begun to taper off. May’s home prices rose 1.15%, slowing from April’s increase of 2.55%, according to data from the Rating & Valuation Department. Average home prices were 20.8% higher in May than a year ago, a record level that puts Hong Kong at the top among the world’s major urban centres. (Source: SCMP, 30 June 2017)
The residential market may take a brief slowing period after recording a 20% YOY growth as buyers start to show signs of hesitation now that housing prices have risen for 13 consecutive months. The recent price growth has been led by a buoyant primary market with a total number of transactions approaching 10,000 units in H1 2017. However, the number of secondary market transactions has been falling in June according to the Land Registry. For H2 2017, a moderate correction could happen but it should not change the overall course of housing prices in Hong Kong yet given a persistent negative real interest rate environment, abundant liquidity, and strong demand.