1) Value add potential and stable rental income continue to attract new investments

News

Bank of China (Hong Kong)’s asset management arm has completed the acquisition of three commercial buildings in Hong Kong - The Wave in Kwun Tong, East Point Centre in Quarry Bay and the non-residential part of Thai Kong Building in Causeway Bay - for a total of HKD3.1 billion (USD397 million) through its first Hong Kong commercial property focused fund. The fund is targeting attractive property types that are lacking in Hong Kong, for example shared working spaces, and good locations which can generate stable rental income. (Source: SCMP, 31 August, 2017)

Agency View

We have seen the market picking up as investors are returning from their summer holiday. Over the week, Hotel Bonaparte at 11 Morrison Hill Road was sold for a reported consideration of HKD450 million (USD57.7 million), translating into a unit rate of HKD15,834 (USD2,031) per sq ft. and a per room rate of HKD5.49 million (USD0.7 million). Kwai Wan Industrial Building, with a total GFA of 169,404 sq ft (15,745 sq m), was sold for HKD423 million (USD54.2 million). The transaction translates into a unit rate of HKD2,500 (USD320) per sq ft, which is at the lower end of price range in this market due to government lease restrictions. We expect the market to gain further momentum in September.

Research View

The property market sentiment continues to beat many people’s expectations. With the persistent low interest rate environment and strong domestic economic growth, investors continue to look for value-added opportunities at a record high price level. Properties offering repositioning and refurbishment opportunities in fringe CBD areas and in emerging office districts are most sought after. We have also seen strong interest in the retail as well as the hotel sector which is supported by a rebound of retail sales and tourist arrivals since the beginning of 2017. As the market is still waiting for more details about the government’s plan for a new industrial revitalisation scheme, it is likely that this will further push up industrial property prices.

2) Recovery in visitor numbers not reflected in tourist spending

News

Overall tourist numbers in July as well as over the first seven months of 2017 have increased by 2.4% YOY, beating the Hong Kong Tourism Board (HKTB)’s estimation in February, which predicted a 2.2% visitor drop for 2017. Tourist numbers from mainland China jumped 5.7% in July YOY. The rise has been supported by events in the course of the 20th Anniversary of the handover, while the dispute between China and South Korea has drawn in more mainland travellers earlier this year. Although tourist numbers are rising, spending by those tourists is continuing to fall. The average overnight visitor spending fell 3.7% to HKD6,250 (USD799) in H1 2017 YOY, while the average hotel rate dropped by 2.4% to HKD1,228 (USD157) on a yearly basis. The HKTB plans to attract more mainland tourists and transit passengers by launching government funded promotions. (Source: SCMP, 31 August 2017)

Research View

In contrast to recovering tourist numbers, visitor spending has followed a continuous downward trend since 2014. The average per capita spending of overnight visitors of HKD6,250 (USD799) in July 2017 represents a fall of 23.1% from the 2013 year-end level of HKD8,123 (USD1,047). Average tourist spending by overnight Chinese visitors declined by 18.6% between 2014 and 2016 (HKD7,275; USD939). Despite the decline, overnight mainland Chinese tourists have remained the group with the highest per capita spending among all visitors (as at year-end 2016). While tourist spending, particularly on shopping, has decreased, local consumption has strengthened, reaching a share of 65.4% of overall retail sales in 2016 - the highest in the past two years. We expect the local retail market to have a more significant rebound in the second half of the year, being supported by the organic growth of local consumption and a stabilising visitor spending. (Source: Census and Statistics Department, 11 May 2017, HKTB)

3) Hong Kong’s July home prices rise at the slowest pace in 16 months

News

Hong Kong’s prices of pre-owned homes rose at the slowest rate in 16 months in July, signalling that the breakneck pace of gains is finally losing momentum. The monthly home price index rose less than 0.1% MOM, from 336.5 in June to 336.8 in July, according to data from the Rating and Valuation Department. That is a clear slowdown from the 0.7% gain in June, and the 1.2% rise in May. (Source: SCMP, 31 August 2017)

Research View

The growth of residential prices has been driven by a positive sentiment in the primary market. The number of primary residential units transacted in July was the second lowest level in the past 12 months, amounting to 952 units, due to fewer primary units being launched in the month. A slower growth is possible as prices are becoming less affordable, but any possible downward adjustment should be short and brief, and followed by a rebound until the market supply overtakes the market demand. An oversupply situation is unlikely to be reached as the amount of new supply in the next two years will not compensate for the accumulated shortfall of 10,927 private residential units completed per annum over the past decade.