1) Hong Kong retail sales in January recorded the lowest drop in 23 months
The Census and Statistics Department (C&SD) released the January 2017 retail sales number of HKD43.1 billion (USD5.5 billion), a YOY decrease of 0.9%, which is the smallest drop in 23 months. Sales value of jewellery, watches and clocks, and valuable gifts decreased by 3.9%, followed by sales of wearing apparel (-5.2% in value); electrical goods and photographic equipment (-24.4%); miscellaneous consumer durable goods (-17.8%); motor vehicles and parts (-9.0%); furniture and fixtures (-9.4%); and books, newspapers, stationery and gifts (-0.6%). On the other hand, sales value of commodities in supermarkets increased by 5.4%, followed by sales of commodities in department stores (+2.8% in value); food, alcoholic drinks and tobacco (+9.9%); medicines and cosmetics (+2.8%); other consumer goods, not elsewhere classified (+12.1%); footwear, allied products and other clothing accessories (+4.0%); fuels (+7.6%); Chinese drugs and herbs (+1.5%); and optical shops (+3.4%). (Source: Census & Statistics Department, 2 March, 2017)
Although January retail sales recorded the slightest drop in 23 months, we need to take into account the Lunar New Year effects. Retail sales tend to be more volatile in the first two months of a year due to the timing of the Lunar New Year, which fell in January this year versus February in 2016. We shall get a clearer picture for 2017 retail market when the February figures are available. Overall, we expect retail sales to stabilise in 2017 but we think it is still early to call it a turnaround for the prime street shop rents in view of the ongoing optimisation and rebalancing of the tenant mix at many of the prime shopping streets.
2) Chinese institutional money invests in Hong Kong’s land market
Ping An Real Estate Capital, a unit of China’s second largest insurer Ping An Insurance, teamed up with a small Hong Kong firm called Road King Infrastructure, and outbid 13 developers, including the city’s largest developers, for the Wong Chuk Hang Station Package One Property Development from MTR. While MTR has not disclosed how much the winning bid was, analysts value the site at between HKD8 billion and HKD9.8 billion (USD1.26 billion), or HKD14,000 to HKD17,000 per sq ft based on a total floor area of 576,950 square feet (53,600 square metres). (Source: South China Morning Post, 28 February 2017)
The move by Ping An continues the trend that real estate players from China or Chinese asset management companies (AMC) would like to deploy part of their capital outside China, especially when they have established an offshore platform where they may have parked some capital and they also have access to offshore financing. For the JV, Ping An will be the financial investor and Road King, a Hong Kong based publicly listed company which has substantial experience in infrastructure and residential development in Mainland China, will be responsible for carrying out the development works.
The latest move by Ping An highlights the shifting appetite of Chinese funds in Asia to support the growth of intra-Asia property capital flow in 2017. As discussed in Colliers’ latest Radar report “2017 – the year in which Asian property capital flow reverse: Fact or Fantasy
”, while Chinese investment interest has heavily focused on US property in recent years, intra-Asian capital flows have been rising. Despite solid near-term US economic prospects, we expect that slower RMB depreciation and political pressures will cause Chinese investment to shift towards Asian markets from 2017. Hong Kong shall continue to attract more Chinese capital because it is on China’s doorstep, it is politically acceptable to Chinese investment, and the Hong Kong dollar is pegged to the US dollar, a simple way to hedge against currency risk.
3) Getting “more out of less” continues in a tight leasing market for occupiers
Most occupier conversations are focusing on workplace utilisation, efficiency and improving the working environment. When overlaying the changing workforce and improved technology, we see the occupiers countering the tight market from image, operational and financial perspectives. As a general rule, when occupiers adopt Alternative Workplace Solutions (AWS) against a conventional office layout, the space utilisation rate can improve between 20-40%. Considering that Hong Kong is one of the most expensive global office markets, there is a huge drive by occupiers to be more efficient with their workspace. For occupiers looking for a temporary solution, the rise of co-working operators provides a way to expand without incurring capex, and offers both flexible lease terms and a more collaborative working environment. As the market continues to stay tight until 2018, getting ‘more out of less’ will continue to be the theme.
Office rent for the core-CBD area has remained stable so far in 2017 as a result of a very low vacancy rate, at 2.1% for Central/Admiralty in February 2017. On the other hand, rent in Kowloon East is being moderated by a large volume of new supply. Wong Chuk Hang has become a very active market since the completion of the South Island Line at the end of 2016, thanks to better-quality office buildings, improving amenities and an affordable rental level. While rent continues its upward trend, Wong Chuk Hang’s vacancy rate is dropping rapidly in 2017. We expect rent in Wong Chuk Hang office market will closely trail the rent in Island East in the future.