1)  Flexible workspace continues its rise in Hong Kong


Agency view 
The recent deal for Regus’ Spaces brand taking up 20,000 sq ft in Causeway Bay and Garage Society expanding its reach to Sai Ying Pun with its third Hong Kong location further demonstrate the appetite for take-up by Flexible Workspace operators in Hong Kong. These two deals take us to over 280,000 sq ft in transactions by Flexible Workspace operators in 2016. We believe the take-up will continue due to increasing demand from MNC’s for flexibility and investment in to tech start-ups.

Research view 
Flexible working operators will take up 475,000 sq ft of office space under new leases in Hong Kong in 2016 by our estimates, then this year they will occupy space equivalent to 1.3% of the total office stock in the core and fringe CBD areas of Hong Kong. While this may not sound like a high proportion, at the margin it should be sufficient to ensure that demand for office space remains very firm. In turn, this factor should ensure that vacancy levels remain low and ultimately underpin rent levels.


2)  Guangdong tourist tax refund offers

News  
In southern China, Guangdong province, excluding Shenzhen, is launching a tax refund service for overseas tourists, including those from Hong Kong and Macau. According to the Department of Finance of Guangdong Province, tourists who stay in Mainland China for less than 183 days will be entitled to a 11% rebate on goods bought with value-added tax (VAT) at designated department stores, while 2% of the tax will be deducted as a handling charge. The minimum purchase is RMB500 (USD75) a day. The refund is valid only when the purchase is made within 90 days of departure. Tourists can claim the refunds from Guangzhou Baiyun International Airport, Guangzhou Nansha Port and Jiuzhou Port in Zhuhai City. Other ports and stores will be added gradually. (Source: InsideRetail Hong Kong)


Valuation and Advisory Services view 
In China, the Guangdong province has recorded the largest number of foreign tourists. It used to be quite common that the final destination of foreign tourists was Hong Kong for one or two days of shopping. Due to this new tax refund scheme, Hong Kong will partly lose its competitive edge as a tax free shopping paradise. This will add further pressure to the Hong Kong local retail market.


3)  Small-to-mid sized tenants and semi-retail tenants remain active

Agency view  
Although sizable relocations have been limited so far in 2016, small-to-mid-sized relocations have been relatively active in comparison. We expect to see this trend to continue until the end of this year. Further to our Hong Kong Market Intelligence Report from last week, semi-retail tenants in particular have been expanding in prime locations in Kowloon and are willing to take up multiple units within the same building to fulfil their expansion requirements. This flexibility offered by these tenants has definitely helped landlords to fill up their spaces, not to mention the fact that they offer higher rental affordability than traditional office tenants. Buildings such as Miramar Tower in Tsim Sha Tsui have been capitalising on their prime locations and successfully securing some new transactions in the recent weeks.

ansion from 2H 2017

Agency view (Strata-titled Sales)
In the past week, 4/F at No.9 Queen’s Road Central was sold for HKD370 (USD47) million, or a unit price of HKD 27,000 (USD3,462) per sq ft, with sales and lease back condition. Sales activity of strata-titled offices should remain steady is the near term.

Research View
We expect Hong Kong office property yields to stay at about 3% over most of 2016, and only to start expanding once US interest rates start rising sharply. Despite deteriorating business confidence, we believe capital values in office property will hold up well for two reasons. The first explanation is that real interest rates in Hong Kong (currently about -2%) will stay negative for some time yet, since interest rates in the US – which Hong Kong rates follow closely as a result of the currency peg – look set to rise gradually rather than rapidly. The second reason is the simple fact that too much capital is chasing too little stock in the Hong Kong office property market. However, we expect office sector capital values to start declining in 2H 2017, by which time real interest rates should have returned to positive territory. This change should cause office property yields to start expanding.


3)  Office yields likely to be stable over 2016, with expansion from 2H 2017

Agency view (Strata-titled Sales)
In the past week, 4/F at No.9 Queen’s Road Central was sold for HKD370 (USD47) million, or a unit price of HKD 27,000 (USD3,462) per sq ft, with sales and lease back condition. Sales activity of strata-titled offices should remain steady is the near term.

Research View
We expect Hong Kong office property yields to stay at about 3% over most of 2016, and only to start expanding once US interest rates start rising sharply. Despite deteriorating business confidence, we believe capital values in office property will hold up well for two reasons. The first explanation is that real interest rates in Hong Kong (currently about -2%) will stay negative for some time yet, since interest rates in the US – which Hong Kong rates follow closely as a result of the currency peg – look set to rise gradually rather than rapidly. The second reason is the simple fact that too much capital is chasing too little stock in the Hong Kong office property market. However, we expect office sector capital values to start declining in 2H 2017, by which time real interest rates should have returned to positive territory. This change should cause office property yields to start expanding.