1)  Stamp duty raised as residential price index approaching record high

News 
The Hong Kong government has more than doubled the property stamp duty for second-home buyers to 15% for the second time in three years to tame soaring real estate prices in the world’s least affordable major city, ahead of an election campaign where housing affordability is likely to be a central issue. Hong Kong’s home prices rose for the sixth consecutive month in September, bringing the accumulated increase over nine months to 8.9%, led by small and medium sized homes, according to government data. September home prices were just 3.5% below the peak in September last year. (Source: SCMP, 4 November 2016)

Agency view 
Following an active primary luxury sales market with record high transactions, such as the 44-50 Chung Hom Kok Road project and the Mount Nicholson, activities in the secondary market had also picked up before the announcement of the new stamp duty policy. On the other hand, the luxury leasing market remains subdued. Properties that used to be popular in the luxury leasing market, such as large size four-bedroom units in core locations, are becoming more available with softening asking prices.

Research view 
Following the government announcement of the increase of ad valorem stamp duty to 15% to replace the doubled ad valorem stamp duty, we expect the new rate will have an immediate impact on market liquidity, especially for the secondary mass residential market. This year's monthly average of residential transactions has been the second lowest over the past decade at 4,441 as of October 2016, and could hit the lowest record if the number of transactions falls below 3,127 units per month in November and December. We expect home prices to stay flat in the short-term as the majority of owners are not under pressure to sell, but prices may well decline gradually over the coming 12 months with investors staying away.  (See Colliers Flash: Tough new stamp duty to curb residential investment, 8 November 2016)


2)  More stocks to ride on the robust office investment market with aggressive prices

News 
A government land site in Kai Tak was tendered at HKD13,500 per square foot on Nov 2, raising HKD8.84 billion in total, and smashing a previous record for the area set two years earlier.  The price far exceeded analysts’ expectations, as it was more than double the HKD6,530 per sq ft China’s Poly Property paid to acquire a similar site in 2014, the prior price record for a land sale in the area.  (Source: SCMP, Nov 3 2016)

Agency view  
Given the higher than expected price achieved by the latest tender sale of the lot in Kai Tak Development Area secured by HNA Group, property owners in Hong Kong will be keen to sell some of the more difficult properties in their stock in the hope of fetching a higher price that may not be justified by the fundamentals of the property itself.  Pricing has become more aggressive with strong buying interest from PRC investors.


3)  Retail sales decline slows down in September


News 
The city’s retail sector shows signs of stabilisation on improved tourist figures, with a narrower 4.1% decline in the value of September sales on a year earlier, the smallest fall in almost a year, according to the latest Government figures. The latest retail figures indicated that the troubled industry may finally have reached bottom, as third-quarter retail sales decreased only 0.6% compared to the preceding quarter. Retail sales in the city have now declined for 19 consecutive months. (Source: SCMP, 7 Nov 2016)


Research view  
Challenges in the Hong Kong retail sector remain significant in view of slowing visitor arrivals, falling tourist expenditure and the strong Hong Kong dollar squeezing sales across the board. The recent news that Forever 21, the US fast-fashion brand, will close its flagship store in Causeway Bay shopping district late next year while opening a new outlet in Mong Kok with smaller space, according to SCMP on 3 Nov 2016, indicates that international brands are still very selective and cost-conscious regarding their network of outlets at prime locations.

ansion from 2H 2017


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.

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.