2) Kowloon East office market offers good value for companies looking for relocation in 2017
Kowloon East leasing activities continue to be active. A large cruise/ travel company is thought to have recently leased a whole floor space in the Elite Centre in Kwun Tong, moving from Tsimshatsui. The rent is very attractive with a rental cap for the second term, indicating that stratified landlords of Kwun Tong are being very flexible over rent and lease terms. Vacancy at selected Grade A offices in Kwun Tong has also picked up lately. In order to attract tenants from other locations and compete with the current and upcoming new supply in Kowloon, we anticipate the rent of Kwun Tong, especially the stratified ownership stock, will continue to come down.
With a steady demand for prime office space in the core CBD, rent in Central and Admiralty should remain strong for 2017. This will threaten affordability for many occupiers, who may push for more relocation to decentralised office markets. With a large new supply of Grade A office in the pipeline and a double-digit vacancy rate, office rent in Kowloon East should remain under pressure for the rest of 2017. That said, we do not expect steep declines in Kowloon East rents due to improved accessibility, new infrastructure and better amenity in Kowloon East.
3) Hong Kong property set to become ‘buyer’s market’ in the first quarter
New home prices are likely to drop as property developers jostle to lure buyers. Competition among developers in Hong Kong is set to pick up with as many as 5,000 new flats ready for launch in the first quarter of 2017. With ample new supply this year, developers’ pricing will be competitive in selective areas in a bid to speed up sales. Competition for potential buyers is set to intensify in Tsuen Wan, the Kai Tak area and Kau To Shan in Sha Tin which are major sources of new supply this year. (Source: SCMP, 3 January, 2017)
Hong Kong developers continue to offload new properties aggressively, in the belief that the primary residential market will remain active regardless of the ad valorem stamp duty launched last year in November. Grand Yoho – Phase 2, a new development in Yuen Long by Sun Hung Kai Properties, has released its price list of 166 units with an average of HKD14,488 per sq ft. (USD1,865 per square ft) , a 24% increase over the first batch of units released in Phase 1 at an average price of HKD11,968 per sq ft (USD1,540) in August 2016.
Hong Kong has enjoyed negative real interest rates since the ending of the Global Financial Crisis since 2009. This helped fuel a boom in Hong Kong residential prices of about 200% between 2010 and a peak in September 2015. Residential prices dropped by about 11% over the next few months before starting to recover. By November 2016, prices had risen marginally over the peak of September 2015.
However, in combination with rising interest rates in Hong Kong we expect that the new stamp duty will dampen the Hong Kong residential market over 2017. We forecast that the overall residential market will witness a mild 5% drop in prices by the end of 2017. A sharper decline over the coming year seems unlikely considering continuing strong demand and low supply in Hong Kong.
Looking further ahead, a sharper downward correction in Hong Kong residential property prices remains possible given both rising supply in the New Territories and the Kai Tak area after 2020 and the prospect of rising real interest rates. At this stage we maintain our view that Hong Kong will return to positive real interest rates by H2 2018. However, an earlier return is entirely conceivable.