1) Newly nominated Fed Chief unlikely to affect roaring Hong Kong property market

News

On 2nd November 2017, U.S. president Donald Trump, nominated Jerome Powell for the new Federal Reserve Chairman. Despite him being the first Fed Chairman in more than four decades without a PhD in Economics, he has worked in investment banks, law and the Treasury Department. Regarding the economics philosophy, he shares the views on the direction of monetary policy with the existing Chair Janet Yellen, suggesting that U.S. interest rates would only be raised gradually, given that the economy continues to grow. (Source: Bloomberg, 3 November, 2017)

Research View 

We expect US interest rates to be raised gradually, suggesting that the US dollar will remain relatively weak. If so, then Asian central banks should not need to worry excessively about exchange rates, giving them greater leeway to keep interest rates low. Since the Hong Kong dollar is pegged to the US dollar, Hong Kong’s interest rates follow US interest rates closely. According to the Hong Kong Monetary Authority, the monetary base  and money supply have increased since 2008, meaning that liquidity is high. We believe that negative real interest rates in Hong Kong will persist at least until the end of 2018; in fact, forecasts from Oxford Economics suggest that real interest rates may remain negative until early 2020.

Negative real interest rates are benefiting the residential property market as mortgage costs are low.  Moreover, supported by PRC companies as well as improving confidence of both occupiers and developers, we are optimistic about the commercial property market.”


2) Shopping malls are popular for this year’s Christmas shopping

News

A survey conducted by Metro Radio regarding the Christmas shopping behaviour revealed that nearly 80% of 6,000 respondents expect this year’s Christmas spending to be higher than last year. First choice for gifts are electronic products, fuelled by the launch of the new iPhone X; while luxury products are the least popular gift category. Most respondents (85%) will choose the shopping mall over online shopping due to the convenience of shopping (32%) in a mall followed by availability of gift wrapping services (19%) and a festive atmosphere (18%). Traditional payment methods via credit cards (25%), cash (24%), Octopus (20%) and EPS (16%) were clearly favoured over mobile payment options with Apple Pay getting the largest share at 6%. (Source: AM730 and Wen Wei Po, 07 November 2017)

Research View

The latest retail sales figures indicate the positive sentiment regarding spending shown in the survey. Retail sales picked up notably, surging 4.1% YOY to HKD106,562 million in Q3, representing the highest growth since Q1 2014. Department stores and medicines and cosmetics rose by 6.7% and 5.5% YOY, respectively in Q3. Jewellery and watch sales have been the main driver of the retail sales growth in this quarter, rising 11.7% YOY in Q3. The results reflect the upbeat consumer sentiment and continued improvement of inbound tourism which grew by 2.2% YOY in the first nine months of the year. The implementation of big data analytics is crucial to develop personalised consumer services that support sustainment of a competitive retail environment. With mainland Chinese tourists playing an essential role in the local retail and tourism industry, the Commerce and Economic Development Bureau will promote smart tourism in Hong Kong, including facilitating online-to-offline (O2O) marketing. Given a further stabilisation of inbound tourism along with a strong local market sentiment, we expect retail sales to increase 1-2% YOY in 2017 and 3-4% in 2018. (Source: Hong Kong Tourism Board, Census and Statistics Department, 3 November 2017; Commerce and Economic Development Bureau, 1 October 2017)


3) Li Ka-shing sells The Center in HKD40.2 billion record deal to trim his flagship Hong Kong assets

News

Li Ka-shing, Hong Kong’s wealthiest tycoon and chairman of CK Asset Holdings, has parted ways with the tallest building in his property portfolio, selling The Center tower for a record sum of HKD40.2 billion (USD5.15 bn) to a consortium of local investors and buyers from mainland China. The buyer is identified as C.H.M.T. Peaceful Development Asia Property, incorporated in the British Virgin Islands, according to the stock exchange filings of Li’s flagship company CK Asset Holdings. The consortium’s largest shareholder is with a 55% stake Beijing-based China Energy Reserve & Chemicals Group (CERCG), according to property industry sources familiar with the transaction. (Source: SCMP, 3 November 2017)

Valuation View

The consortium’s largest shareholder is a state-owned company, China Energy Reserve & Chemicals Group (CERCG), with a 55% stake while the rest of 45% is to be owned by a group of local investors including chairman of Wing Li Group, Lo Man Tuen, and chairman of Acme Group, Chan Ping Che, and the family of Robert Ma Kiu-sang, head of Koon Wing Motors.

For portfolio diversification and desirable returns, Hong Kong, being a major city in China, is an attractive location to mainland investors. In addition, mainland companies are eager to develop business in Hong Kong and are willing to setup headquarters in the CBD.  With the soaring demand for office spaces by PRC companies in prime locations, more take-ups by mainland companies are expected in the foreseeable future.

Research View

This is the biggest investment property deal in the world ever, and is substantially larger than the sale of Asia Square Tower 2 in Singapore for USD1.5 bn (HKD11.7 bn) in September 2017 and the sale of MassMutual Tower for HKD12.5 bn (USD1.6 bn) in November 2015.  As the price is for 75% of the building only, the implied value of the whole building amounts to HKD53.6 bn (USD6.9 bn). Despite the large lump sum price, the price per square foot is roughly HKD33,000 (USD4,220), close to the district’s average. This is a further sign of the remarkable strength of demand for Hong Kong investment property assets.