10 May 2017
1) Positive retail sales growth in March adds to evidence of an imminent retail market turnaround
Retail sales in Hong Kong in March 2017 grew for the first time since February 2015 on upbeat demand and visitor arrival figures which surged 8.8%, the biggest growth in more than two years. Spending on jewellery, watches and other luxury items – items usually popular with mainland Chinese visitors – grew the most in value, jumping 8.4% in March. Meanwhile, sales of motor vehicles also rose 16% in the month, as buyers rushed to purchase electronic cars before the removal of a government tax waiver on April 1. Sales of apparel and commodities in supermarkets grew 2.5% and 2.6% respectively. The retail industry is getting closer to the end of the tunnel but more time is required to prove that the recovery is sustainable. (Source: SCMP, 5 May 2017)
Although the monthly retail sales have increased in March, the quarterly retail sales number for Q1 2017 is still down by 1.3%. We believe the recovery of the retail market is imminent with positive economic prospects, a stable local employment market, and increasing tourist arrivals. We have observed a strong investment interest in retail properties, in particular for retail podiums in fringe-CBD areas, such as the Western District. Investors are more interested in refurbishment and value-add opportunities catering for the local population.
2) In defiance of government cooling measures, local residential market’s strong momentum continues
The number of residential property transactions, in both the primary and secondary markets, jumped 20.5% month-on-month (MoM) to 7,060 units in April, marking four consecutive months of growth and the highest since September, according to Land Registry. The total consideration for residential property transactions was HKD69.6 billion (USD9.0 billion), up 38.1% MoM being the highest since December 2007. (Source: South China Morning Post; Land Registry, 4 May 2017)
In addition to the residential sales market, the luxury leasing market continues to be active, particularly in traditional areas like Mid-Levels and South Side. Many corporate assignees who aim to relocate to Hong Kong over the summer of 2017 flew out over the past two weeks aiming to secure their apartments while receiving the placements from international schools. Leasing activities at Marina South have started to pick up lately with its first transaction of a 4-bedroom unit with 1 car parking space. There are still a number of units currently available with an asking rental ranging from HKD85,000 (USD10,968) to HKD120,000 (USD15,483).
The flat rate of 15% stamp duty applies to all buyers who purchase multiple residential units with effect from 12 April 2017. The tighter measures have failed to impact the market sentiment because end-users constitute the majority of housing demand. The number of multiple units purchased under one contract only accounted for 4.7% of total residential transactions in March, according to Anthony Cheung, Secretary for Transport and Housing. Amid the low-interest rate environment and stable domestic and external markets, the market sentiment has stayed strong while developers are speeding up launching their developments to absorb the demand. The leasing market has also benefited from strong user demand despite the softer top-end segment due to multinational companies’ reduced housing allowances.
3) Proposed EFLS demonstrates Government commitment to Kowloon East
On 2 May, the Civil Engineering and Development Department (CEDD) launched a two-month interim public consultation exercise for the Detailed Feasibility Study (DFS) for an Environmentally Friendly Linkage System (EFLS) for Kowloon East to collect public views on the two elevated transport modes recommended under the first stage of the Study, i.e. the automated people mover and the monorail. The DFS is being conducted in two stages: the first stage, which has been completed, evaluated various green transport modes and recommended the two elevated transport modes (i.e. the automated people mover and the monorail) as most suitable for enhancing the connectivity of Kowloon East. On the second stage, proposals will be made in respect of the EFLS's alignment, coverage and impacts on the Kwun Tong Typhoon Shelter. The public consultation period will end on 2 July and a public forum will be held on 27 May. (Source: CEDD, 2 May 2017)
En bloc industrial buildings purchases in Kowloon East have been popular with local developers actively increasing their land banks and investors gearing up for the positive development prospects of Kowloon East. We expect industrial building investment will continue to flourish in the upcoming quarters. On the other hand, new office supply absorption rate at Kowloon East has been slow in 2017 due to the approximate 2 million sq ft (186,000 sq m) supply of new office space in 2017 and 2018. The cost-effective rental package and good specifications of the newly built buildings should attract office tenants to take up new space. Nevertheless, we expect the take-up rate of new office supply will continue to be slow and the vacancy rate of the new office space will likely remain high in 2018.
The long-term investment potential in office and industrial properties in the Kowloon Bay and Kwun Tong areas remains positive. The latest development of EFLS further demonstrates that the Government is actively pursuing its plan to transform Kowloon East into a new CBD. Due to its speed and efficiency, the travelling time within Kowloon East is expected to be significantly reduced. With improved infrastructure and business amenities in Kowloon East and a high office rent in core-CBD areas, the decentralisation process will continue and we expect the absorption rate will gradually pick up. Compared to rising office values in the core-CBD, Kowloon East offers greater potential for capital appreciation.