09 August 2017
1) Sluggish US growth is good for Hong Kong property
The US economy grew 2.6% in Q2, thereby averaging a 2% pace in the first half of the year. The second half of 2017 will be much of the same, with moderate consumer spending, firmer business investment and a relatively resilient global backdrop. Growth will pick up modestly to 2.4% in 2018 on the back of a modest fiscal stimulus programme. Low inflation will limit the Fed to have two rate hikes in 2018 while balance sheet normalisation should start in the fourth quarter of 2017. (Source: Oxford Economics, 5 August 2017)
Since the US seems to be stuck in a growth phase of about 2%, it is increasing unlikely that US interest rate will rise rapidly. This will reduce upward pressure on Hong Kong interest rates (which are effectively tied to US rates by the currency peg), supporting our view that Hong Kong will not return to positive real interest rates until end-2018. This is good news for investment bank and asset management occupiers in Central and should further support residential property prices. In addition, the recent weakness of the Hong Kong dollar is making it cheaper for mainland Chinese tourists to visit Hong Kong. This should support the recovery that is beginning in the Hong Kong retail sector.
2) Recovery of retail sales continues
Firm local consumption and the improving prospect of inbound tourism led to a continuous retail sales growth for the fourth consecutive month. The provisional sales value for June has been estimated to edge up slightly by 0.1% YOY, totalling HKD33.7 billion and Q2 increasing by 2.4% compared to Q1 2017. In H1 2017 total retail sales value decreased by 0.6% YOY. Supermarket (+0.4%), department store (+0.8%) and food, alcoholic drinks and tobacco (+2.6%) sales had the highest positive impact on the overall sales value. However, the jewellery, watches and clock sector, as well as medicines and cosmetics, took a slight dip of 0.8% and 0.5% YOY, respectively. Apparel and footwear sales fell by 1.4% and 4.5% and electrical goods and photographic equipment slumped another 8.1% YOY. Continued favourable job and income conditions should provide a solid base for local consumer sentiment. However, the recovery time of inbound tourism and the development of the external economic conditions are further determining factors for short-term retail performance. (Source: Census and Statistics Department, 3 August 2017)
The retail market is slowly recovering. Compared to H1 2016 when overall retail sales took a dive of 10.5% and the jewellery and watch sector slumped 21.1% YOY, total sales dipped only slightly in H1 2017 YOY while the jewellery and watch sector recorded a growth of 0.9% in the same period. However, the latest decrease in the jewellery and watch sector sales in June shows that it remains fragile amid fluctuations of inbound tourism, especially from Mainland China. Although there has been an increase of 2.3% YOY for mainland visitors in H1 2017, the number fell by 3.4% YOY in June. Therefore, especially luxury retailers remain cost conscious. Chow Tai Fook, for instance, continues to adjust its locational strategy and reduces the number of prime shops to control operation costs. After thirteen years of operation, the company has closed its duplex flagship store (3,244 sq ft) in Holiday Inn Golden Mile, located on Nathan Road in Tsim Sha Tsui. In total, there will be a net reduction of up to five shops in 2017. (Source: CSD, HKTB, and HKET, 3 August 2017)
3) Kowloon East to catch stronger attention with new supply coming up
Low rents in Kowloon East continue to attract multinational companies to relocate for rental savings. OTIS, one of the largest elevator manufacturing companies, leased two floors in the new Grade A office building Goldin Financial Global Centre in Kowloon Bay to consolidate its operations in multiple locations. The company can save almost half the rent for one of its office in Quarry Bay by leasing at a headline rent of about HKD25 per sq ft in the new premises. Based on a gross floor area of about 35,000 sq ft each floor, the monthly rent is about HKD1.75 million. (Source: HKET, 3 August 2017)
Following the completion of the Goldin Financial Global Centre in 2016, Mapletree Bay Point and Two Harbour Square will together provide a gross floor area of over 1 million sq ft, being the largest developments in the districts in H2 2017. We expect the rental gap between Hong Kong Island and Kowloon to widen further, making Kowloon East more attractive to tenants who look for significant rental savings and consolidation. Kowloon East development stays positive for the long term with the Kai Tak development bringing in new communities and amenities to the area. Hosting the second largest Grade A office stock in Hong Kong, Kowloon East should speed up on improving its accessibility to position itself as a top-tier commercial hub for multinational companies to consider moving their full operations into the area.