1) IMF warns Hong Kong property market would cool if Fed rates hike as projected

News

In the International Monetary Fund’s (IMF) latest Hong Kong report, it is concerned that Hong Kong’s housing prices will cool down next year if Fed Fund rates are hiked as projected because the Hong Kong dollar is pegged to US dollar. IMF described Hong Kong’s property market as “booming and overvalued”, suggesting that property prices could undergo a correction despite the demand-supply imbalance. The sensitivity of households’ debt service burden to interest rate changes remains high as a significant portion of new mortgages is based on floating rates and indexed to the Hong Kong Interbank Offered Rate (HIBOR). (Source: Bloomberg & IMF, 29 November 2017)

Research View 

Low financing costs, reflecting persistent low interest rates (and negative real interest rates), have been the key drivers of Hong Kong home prices. We agree that individual buyers in Hong Kong will become more sensitive to interest rate changes amid steady growth in already expensive prices. According to the Hong Kong Monetary Authority, one-month HIBOR has just hit 1% for the first time in the last ten years, indicating that Hong Kong’s interest rates are set to rise with the increase of Fed Fund rates. However, strong fundamentals and a demand-supply imbalance are supporting the valuation of Hong Kong properties. Based on a forecast of a 2.0-2.3% inflation according to Oxford Economics over the next two years, we now expect real interest rates in Hong Kong to stay negative until about the beginning of 2020. We expect home prices in the territory to increase 8-10% in 2018, thanks to a loose monetary environment and strong economic growth.

2) Tsim Sha Tsui’s office market is regaining momentum

News

New World Development Company Limited has said the office component of the HKD20.3 billion (USD2.6 billion) Victoria Dockside complex, namely K11 Atelier, in Tsim Sha Tsui is already 70% leased, and will be fully rented by March or April next year. The development is benefiting from the trend of companies leaving the CBD for more favourable rents in neighbouring and decentralised areas. Tenants include the Japanese Mizuho Bank Ltd., which leased six floors and moved into the building in October, relocating from Pacific Place, and Taipei Fubon Commercial Bank Co; both of these were able to seize the opportunity of lower “early bird” rents. The building is aiming to attract millennials by offering well-being elements including Yoga, meditation classes and more. (Source: Bloomberg, 29 November 2017)

Research View

Tsim Sha Tsui’s Grade A office market has been stagnant due to a lack of new office supply over the past decade. The Express Rail Link, expected to open in Q3 2018, will make Tsim Sha Tsui a gateway between Hong Kong and major cities in mainland China and another popular office destination for PRC companies, especially for those based in the Greater Bay Area. Meanwhile, the West Kowloon Cultural District development is taking shape and will offer new arts, cultural, entertainment, and exhibition facilities, adding 810,000 sq ft (75,300 sq metres) of hotel and office space to Hong Kong’s property stock. The cultural and entertainment facilities will improve the district’s amenities substantially, making it more attractive for potential tenants, especially for the media and tech sector. We expect leasing activity to pick up in the light of upcoming key infrastructure, and new developments adding office space supply to the district.

3) Government proposes increasing the plot ratio of the remaining developments in Kai Tak

News

The Planning Department has proposed increasing the plot ratio for more than ten sites in the Kai Tak Area including those along the Kai Tak Runway Area and in the apron area from 5.5 to 7.0 times. However, several developers have shown opposition to the increase of plot ratios. K. Wah Properties pointed out that the developments could be taller than those in the inland area, potentially violating the Harbour Planning Guidelines for Victoria Harbour and its Harbour-front Areas, stating that developments on the harbourfront should adopt a gradation of height profile with building heights descending towards the Harbour. (Source: HKET, 1 December 2017)

Research View

The government has been proposing to increase the housing supply by increasing development scales. However, walled-buildings on the harbourfront could have a negative impact on the property market. In addition to the blocked view of the buildings in the inland area, the proposal will increase the population density and create a strong traffic load which may exceed the capacity of the district. This could affect the livability and the accessibility of the district, leading to a decline in the image and value of properties in the area. While Kowloon East is set to be developed as Hong Kong’s CBD2, the balance between property supply and the working and living environment is the key to success.