07 June 2017
1) Signs of structural weakness revealed in the latest competitive ranking
The study from International Institute for Management Development places Hong Kong ahead of Switzerland and Singapore as the most competitive economy for the second consecutive year based on four indicators: economic performance; government efficiency; business efficiency and infrastructure. While Hong Kong topped the rankings on government efficiency and business efficiency, the city’s economic performance and infrastructure were lagging behind its major competitors. In addition, Hong Kong lost to Singapore, Sweden and the US in terms of digital competitiveness. (Source: SCMP, 1 June 2017)
Hong Kong has always taken pride in our highly efficient business environment. However, the city should take note from the latest ranking as the results reveal the structural weakness of its economy, especially in terms of digital competitiveness, as it will limit our growth potential. The ability of Hong Kong to adapt to different disruptive forces, for example, AI, fintech, block-chain and other formats of new economies, will be the key to its long-term success. The spreading of co-working space operations in Hong Kong has demonstrated the real estate industry’s ability to cope with new challenges and contributes to the nurturing of start-up and high-tech friendly atmosphere.
2) Retail sales recovery has yet to lift prime-street rent
Hong Kong’s retail sales edged up 0.1% in April for the second straight month of increases, following a two-year period of decline. However, it was lower than the 3% increase in March. For the first four months, Hong Kong’s retail sales have been down by 1.0% YOY. There have been positive growths in luxury goods, cosmetics, furniture, apparel and footwear. Sales for electronic goods, consumer durables and motor vehicles and parts were down. Statistics from the Tourism Board showed that visitor arrivals in April picked up 1.9% YOY, and 3.2% for the first four months of the year. The recent growth provided much-needed relief to the tourism industry, which weathered a 4.5% drop in inbound visitors last year. (Source; Census & Statistics Department, Hong Kong Tourism Board, 31 May – 1 June, 2017)
A temporary shopping outlet in San Tin, Yuen Long, at the border of Hong Kong and the mainland, is set to open in July for a tentative period of two years. The pop-up outlet comprises 214 shops, mostly restaurants, boutiques, and shops for consumer products such as baby milk powder, electrical appliances and medicines. The outlet aims to cater for the influx of mainland shoppers and ease the pressure on shopping areas in the New Territories, such as Sheung Shui, Sha Tin and Tuen Mun. If this mall proves to be successful, we believe more large-scale malls along the border in Hong Kong will be built to cater for customers on both sides of the border.
While the growth of retail sales in April was slower than March and the YTD retail sales growth remained negative, we expect the total retail sales for 2017 will recover from the recent 2-year slump to achieve a single-digit growth. The number of tourist arrivals has rebounded and will support the sales of luxury items, cosmetics and apparels. With a brighter economic outlook and stable employment market, domestic consumption, which comprises 70% of the local retail market, will continue to rise. However, we believe the prime-street rent will remain soft for the rest of this year while luxury brands are still cautious and waiting for more evidence of a sustained recovery of the retail market.
3) Record price for Kai Tak commercial site a positive sign for Kowloon East office market
Nan Fung Development has won the latest Kai Tak commercial site at a record price of HKD24.6 billion (USD3.16 billion). With a total gross floor area reaching 1.91 million sq ft, the price represents HKD12,863 (USD1,670) per sq ft, which is 7% higher than the top end of market expectation ranged from HKD14.3 billion to HKD23.0 billion (USD1.84 billion to USD2.95 billion) or HKD7,500 to HKD12,000 (USD962.54 to USD1,540.24) per sq ft. The auction result exceeded the HKD23.28 billion (USD 2.99 billion) that Henderson Land Development paid for the Murray Road car park site in Central on May 16. (Source: SCMP 31 May 2017)
More quality buildings consisting of high-end building specifications and environmental standards will become available in Kowloon East. Kingston Financial Centre, a new triple Grade A building in Kowloon Bay, developed by Swire and subsequently sold to Kingston Financial Group in 2016, has started the early marketing for lease. The building consists of 25 commercial floors (22 office floors) with a floor plate of approximately 28,462 sq ft (2,645 sq m) and a clearing ceiling height of 3.00–3.45m. Kingston Financial Centre’s rent is estimated to be in line with the Kowloon East market.
According to the latest Kai Tak zoning plan, the Nan Fung site is intended for a landmark commercial tower with a maximum building height restriction of 200 metres and will be comparable to ICC in West Kowloon. The record price shows developers’ confidence in Kowloon East’s long-term potential. Rental growth in Kowloon East has been lagging behind other districts due to its high vacancy rate (10.8% for Q1 2017). However, high-quality buildings with lower rental costs in Kowloon East will prove to be attractive to tenants who are looking for ways to move into quality buildings at a reduced cost. Given the large new office pipelines in upcoming quarters, landlords in Kowloon East may consider offering a longer lease term for potential tenants.
4) Record high residential rents, but the luxury market remains soft
Hong Kong residential leasing market stays hot with a consecutive growth in home rents since April 2016. The Rating and Valuation Department (RVD) has released the preliminary figures for private residential rental indices for April. The overall residential rental index increased 2.5% YTD to 178.0, a new record high, and was largely driven by an active rental market for small- and medium-sized flats. YTD growth for unit size below and above 1,076 sq ft (100 sq m) has been 2.7% and 1.9% respectively. (Source: Rating and Valuation Department, 31 May 2017)
Expatriate remuneration packages for middle-level managers in Hong Kong, with cash salary, benefits and tax being the main elements, have fallen to a five-year low at HKD2 million (USD265,500) per year, according to the figures collected by ECA International in late 2016. This aligns with Colliers’ figures for the luxury rental market, which is still 15.7% below its previous peak in September 2011. While the demand for the top-end segment or ultra-luxury units should remain relatively soft, the general outlook has turned more positive amid a brighter global business outlook. We expect rents for the overall luxury market to increase modestly in 2017 but will trail behind the overall market, the expectation of a further decline in MNC’s housing allowance is unlikely.