2) As rents in Central continue to rise, more businesses are opting for cheaper office space in outer areas
Despite the perception that the newly developed areas are well out of the city centre, a growing number of businesses are foregoing their pricey Central Business District locations for cheaper options. Average rents in Central costing around HKD110 per sq ft per month compared to Hong Kong East’s HKD47 to HKD48 per sq ft. Although cost is still a factor, MNCs are less attached to core CBD with innovation in IT and greater connectivity in decentralised locations. (Source: SCMP, 30 November, 2016)
Airlines continue to move across to Kowloon due to rising rent in Hong Kong Island’s CBD. Ten years ago, Central was the favourite spot for international airline offices. However, due to continuous rental increases in Central’s Grade A buildings, airline offices have been shifting to Admiralty, Wan Chai and Causeway Bay for cost-saving. Recently, we have started to see international airlines and private jet companies downsizing and surrendering their space in Admiralty, Wan Chai and Causeway Bay. With an effective rent of HKD70 per sq ft (net) in these area, moving to Kowloon East and Tsim Sha Tsui is becoming more justified, especially for cost saving.
Research view The rental gap between Hong Kong Island and Kowloon will continue to widen in 2017, on the basis of our latest office outlook. With upcoming supply of new Grade A office space in Kowloon East up to 2 million sq ft, rent should drop by 7% in the next 12 months. Given our view that a low vacancy rate will persist for Hong Kong Island with healthy demand, rent will rise by 4%. We expect more relocation and new leasing activities in decentralised submarkets in 2017, and we think that landlords of office buildings which are more than ten years old in those locations will need to start building enhancement works in order to retain their existing tenants.
3) Hong Kong retail sales slide 2.9% in smallest drop, marking reason to be optimistic
Retail sales value has been contracting for 20 consecutive months in Hong Kong, but the contraction in October has been the smallest seen in 2016 so far. The October figure, provisionally estimated at HKD36.1 billion, decreased by 2.9% compared to the same month in 2015. Over the first 10 months of 2016, the value of total retail sales decreased by 8.9% compared to the same period in 2015. The value of sales of jewellery, watches and clocks, and valuable gifts edged down by only 0.1%. On the other hand, the value of sales in supermarkets increased by 3.5% in October 2016 over a year earlier. This was followed by sales of food, alcoholic drinks and tobacco (+1.0% in value); other consumer goods, not elsewhere classified (+2.2%); fuels (+5.5%); footwear, allied products and other clothing accessories (+4.9%); furniture and fixtures (+2.8%); and Chinese drugs and herbs (+2.1%). (Source: Census & Statistics Department, 1 December, 2016)
The contraction period for retail sales has more or less come to the end as we expect the trend to subside further in coming months. However, rents for retail shops on prime streets will probably take more time to stabilise and the rent should move by +/- 5% for 2017.
Hong Kong's total retail sales have been suffering since mainland tourist visits to Hong Kong started declining in 2014. However, the retail landscape has been shifting from expenditure by tourists to expenditure by local people. Local consumption's share of total retail sales has increased to 67% in 2016 from 58% in 2014. We expect the retail industry will continue to introduce new concepts catering for local consumers. However, rents will probably remain under pressure as owners revamping the tenant mix.
4) Small flats become more popular as Hong Kong home prices rise to the highest level in a year
The prices of new homes in Hong Kong climbed 2.6% in October to one-year highs. The monthly price index for private homes stood at 303.8 in October, 0.75% below the peak in September last year, according to data released by the Rating and Valuation Department on 30 November. Hong Kong remained one of the most expensive cities globally to own a home, with developers continuing to build small flats to make it affordable for younger, first-time buyers. Government data showed flats of 431 sq ft to 753 sq ft registered the largest growth in home prices –up 6.8% in the first 10 months of this year. However, higher stamp duty and an imminent rise in interest rates in the United States are expected to cool the buying fever. (Source: SCMP, 30 November, 2016)
According to the latest property indices, residential units with a size below 430 sq ft are showing the best performance with a monthly increase of 2.7% in Oct 2016. For specific renewed private residential estates, the average increment was 2.8%. This reflects the stable and keen demand for small-sized units in the recent market.
Younger home buyers, who want to have flexibility, freedom and privacy, are making mini-flats popular. Recently, local developers, both small and prominent, have built and sold studio type and mini-flats, which have been well received by the market.
The increase of stamp duty in November and the expectation of interest rate hikes in the United States may slow down the price growth in the next few months. However, the strong and stable local demand should still ensure steady growth in housing prices, and mini-flats ranging from 100 to 150 sq ft will probably become more popular next year.