1)  DJI to open its largest store for drones in Causeway Bay


News 
Da-Jiang Innovations Science & Technology Company (DJI), the world’s biggest maker of drones, said it would open its 10,000 sq ft store (over three floors) at Tower 535 in Causeway Bay. The company plans to move in by the end of September. Hong Kong would mark the third flagship retail location for DJI, following the company’s first store in Shenzhen and the second outlet in Seoul that opened in March. Earlier in May, DJI expanded its “Experience Zone” inside Terminal 1 of the Hong Kong International Airport to show travelers the latest aerial photographs and videos taken by drones. (Source: SCMP, 30-31 August 2016)

Research view 
The Hong Kong retail landscape is rapidly changing with structural change sweeping the retail industry when technology and e-commerce platform become more sophisticated with the rise of millennial shoppers shifting towards an emphasis on creative shopping experiences. Since international luxury retail brands are no longer dominating the market, the current downturn has allowed other players to emerge and innovate. The retail industry is moving onto digital platforms to improve shopping experiences and deliver greater personalisation with the intention of attracting, connecting and engaging with the most valuable consumers. Looking ahead, Augmented Reality/ Virtual Reality will be increasingly popular to facilitate personalised shopping.


2)  The fast growing e-commerce and omni-channel retailing will support demand for warehouses and logistics centres

Research view  
A rapidly rising demand for trendier, faster and cheaper fashion from millennial looks set to conquer Hong Kong retail landscape. Fast fashion encourages consumers to buy heaps of items, discard them after they have been worn a few times and then come back for another batch of new outfits. For brands to keep ahead of the competition, they need to ramp up their investments in e-commerce and omni-channel retailing. The booming e-commerce industry should support demand for warehouses and larger spaces in logistics centres.


3)  Retail rents will hit bottom in 2H 2017

News  
Luk Fook Jewellery has recently renewed its store at King’s Road in North Point with a 25% rental reduction, settled at HKD200,000 (USD25,641) per month. This compares with the previous rent of HKD265,000 (USD33,974). (Source: Hong Kong Economic Times)

Research view  
In the first half of 2016, rents of street-level stores in the traditional top four shopping locations decreased by a further 6% after a 24% decline in 2015. We do not expect rents to rebound anytime soon. According to our projections, rents for prime street shops in core areas will decrease by 10% for the whole year of 2016, and will be further reduced by 6% in 2017. In line with the retail sales forecasts, we expect rents to rebound starting in the second half of 2017, reaching an annual growth rate of 2.3% in 2018, 4.7% in 2019 and 4.1% in 2020.

4)  Growth of Hong Kong home prices accelerated to 1.9% MOM in July

News  
The growth of Hong Kong’s home prices accelerated in July with an increase of 1.9% MOM, faster than the 0.2% MOM growth seen in June, data by the Rating and Valuation department showed. It was the fourth consecutive monthly increase, bringing a cumulative growth of 3.7%. Home prices are now 8% below their September peaks in 2015. In the mortgage market, the Hong Kong Monetary Authority said the number of mortgage applications in July increased by 4.4 % MOM to 10,281, while mortgage loans approved in July grew 2.7% MOM to HKD22.9 (USD2.9) billion. Mortgage financing for first-hand homes fell 1.4% MOM in July to HKD4.6 (USD0.6) billion, reflecting the innovative financing methods offered by developers. (Source: SCMP, 31 August 2016)

Research views  
The market should not read too much into the recent rebound in the residential market. With negative real interest rates persisting, the Hong Kong residential market has stablised since April despite increasing global risks. We expect home prices to slide 10% and would achieve a soft landing in 2016, considering the severely stretched affordability, potential interest rate rises following the lead of the US over the next few months, an ample pipeline of new apartments about to come on the market. We think residential property prices will continue to fall going forward but at a slower pace and the downward cycle should be longer than expected.
 

ansion 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.