1)  Wong Chuk Hang is fast becoming an office location to reckon with

Agency View

With pressure to cut costs amid high rents in the core and fringe Central Business District, multi-national firms are now more inclined to consider decentralised areas such as Wong Chuk Hang (WCH) for their operations. Reflecting this growing appetite, since the launch of the South Island Line, the number of inspections has increased in WCH. Recently a number of companies in finance, shipping, legal and retail industries have leased substantial office space in WCH. For example, according to market rumour, so far this year a shipping company has leased 30,000 sq ft (2,790 sq m) at One Island South for its relocation from Central, while a luxury goods brand has leased 15,000 sq ft (1,390 sq m) at 41 Heung Yip Road for its relocation from Causeway Bay.

Research View

The new South Island MTR line with its ten minutes travelling time from Admiralty to WCH has solved most of WCH’s transportation problems. In addition to transport infrastructure, WCH’s office stock has experienced a significant increase in the last few years. By the end of 2013, prime office stock in WCH stood at 1.1 million sq ft (102,000 sq m; NFA basis) and by the end of 2016 this had increased to 2.3 million sq ft (213,700 sq m; NFA basis). In 2016 alone, four new office buildings were added to the market including Vertical Square, 41 Heung Yip Road, W50 and 38 Southside. WCH rent is currently the lowest among the major submarkets at HKD32.7 (USD4.2) per sq ft per month (NFA basis), compared to Kowloon East’s HKD34.4 (USD4.4) per sq ft per month (NFA basis). The vacancy rate remained at 27% at the end of 2016, with a sizable supply of quality office space in a convenient location. With its lower rent, available quality space and close proximity to the CBD, Colliers expects more MNCs to move into this area in the future.

2)  End-user demand and developer discounts should keep the residential prices buoyant

News

According to the latest statistics from the Land Registry, the number of Sale and Purchase Agreements of residential units recorded in January 2017 was 3,286. This indicated a MOM decrease of 7.4% with a YOY growth of 60.7%. The total consideration paid for residential units was HKD27.4 billion (USD3.53 billion) in January; a MOM decrease of 16.5% and a YOY increase of 73.7%.

Research View

The 61% YOY increase recorded in January is a recovery from the second lowest number of sale and purchase agreements ever recorded in Hong Kong in January 2016. We believe the introduction of the 15% ad valorem stamp duty on foreign and non-first time buyers’ housing purchases has contributed to the continuous negative MOM performance in December and January. Despite the government’s cooling measures, Colliers expects demand in the primary sales market to remain strong as developers offer aggressive financing schemes to attract prospective buyers, while the secondary market should remain relatively subdued. Given strong demand from end-users and first-time buyers, we foresee home prices to grow 0-5% in 2017, mainly driven by primary sales.

3)  Luxury goods sales record a YOY comeback

News

According to the Census and Statistics Department, total retail sales value in Hong Kong in December 2016 declined 2.9% YOY, representing the 22nd consecutive months of decline since March 2015. Many major subcategories recorded negative growth, including consumer durable goods (-20% YOY), clothing (-3.7% YOY) and department stores (-3.2% YOY). However, the retail sales value of luxury goods, e.g. jewellery, watches and clocks, and valuable gifts, rebounded with YOY growth of 2.3% in December, the first increase since October 2014. The whole year value of total retail sales stood at HKD436.7 billion (USD56.3 billion), down 8.1% from last year.

Research view

The Hong Kong retail sector is in a process of transformation. The tenant mix in prime locations has become diverse as creative food and beverages, sports and lifestyle, beauty and cosmetics and modern living offerings fill up spaces given up by luxury brands. Under this structural transformation, we see two potential reasons for the YOY rebound in luxury goods sales in December 2016. First, we have observed that a number of leading jewellery shops have taken steps to attract younger customers and millennials by launching creative jewellery products at lower price points. Secondly, mainland tourist arrivals increased with YOY growth of 6.1% in December for the second time in 2016 after July. Despite the rebound, it is yet to be seen if the positive growth will continue into 2017. We currently assume that retail rents in prime streets will grow in a range of -5% to +3% in 2017.