1) Wong Chuk Hang’s emergence as a new business district offers redevelopment opportunities
Wong Chuk Hang is gaining popularity as a commercial hub with developers converting factory space into offices, retail and hotels. The recent closing of the sale of BT Center, a 15-floor commercial building with a GFA of 107,000 sq ft (9,941 sq m) on 23 Wong Chuk Hang Road, is the fourth sale of an industrial project exceeding HKD1 billion (USD128 Million) this year. It is reported that the Hong Kong-listed developer Rykadan Capital has acquired the property for a total consideration of HKD1.48 billion (USD 190 million), translating into a unit price of HKD13,800 per sq ft (USD1,768.3 per sq ft). The property was approved for commercial use in 2015. (Source: Mingtiandi, 3 October 2017)
Wong Chuk Hang is increasingly attractive to both large-scale as well as mid-sized developers, which demonstrates their confidence in the district’s prospect as a new business district. Due to its proximity to the existing CBD via the South Island Line and the persistent supply shortage on Hong Kong Island, we expect rents and demand for office space to move up quickly in the future.
In August, the monthly net effective rent for Grade A offices in Wong Chuk Wang amounted to HKD33.9 per sq ft (USD4.34 per sq ft), representing an increase of 6.3% YOY. We forecast Grade A office rents in Wong Chuk Hang to increase 7% for the calendar year of 2017, reaching HKD35.1 per sq ft (USD4.5 per sq ft), and another 8% growth until 2021, representing the highest growth potential among all major office districts. While the recent Colliers Occupier Survey shows that companies are positive about their business prospect, they are more conservative about office budget. The high rental discount on Central Grade A offices, currently amounts to 73%, together with the increased convenience through the opening of the South Island Line, have made Wong Chuk Hang a hot spot for new office development.
2) Hong Kong remains at risk of a housing bubble
Hong Kong continues to have the least affordable housing among global financial centres featured in a study by UBS. According to the survey, a skilled service worker in Hong Kong would need to work for 20 years to afford a 60 sq m flat near the city centre, compared to 18.5 years in 2016. The report found overvaluations in the majority of cities surveyed, with Toronto now facing the greatest risk of a housing bubble, followed by Stockholm, Munich, Vancouver, Sydney, London and Hong Kong. UBS concluded that housing is less affordable in Hong Kong than in any other city, and the average living space per person amounting to only 150 sq ft (14 sq m). (Source: UBS; HKET, 28 September 2017)
Hong Kong home prices have increased 25% for 17 consecutive months as of August 2017, statistics from the Rating and Valuation Department showed. The government has been monitoring the residential market closely to prevent the market from overheating. The average capital ratio of banks in Hong Kong stood at 19% in June, which was higher than global standards, while cooling measures including the 15% stamp duty and the lower loan-to-value ratio for non-first time home buyers support the confidence of local end-users who believe that the market is less risky compared to the one in 1997 despite the high price-to-income ratio. Assuming the global environment remains politically stable, we believe property prices to remain high in 2018 until Hong Kong’s real interest rates turn positive in late 2018 the earliest.
3) Interest in industrial properties heating up ahead of the Policy Address
Maxwell Electronics Group sold the whole block of Maxwell Industrial Building in Kwun Tong for a total of HKD1.39 billion (USD178 million), which was lower than the asking price by about 30.5%, to a local company, Laws Group. With a site area of 19,180 sq ft (1,782 sq m), the site can be redeveloped into an office building given a plot ratio of 12 times. Based on a developable gross floor area of 230,000 sq ft (21,368 sq m), the average price is about HKD6,043 per sq ft (561 sq m). (Source: HKET, 9 October 2017)
The government is expected to provide more details about the resumption of the industrial revitalisation scheme and lowering the threshold of ownership consensus for redeveloping industrial buildings on this Wednesday’s Policy Address. Despite the industrial revitalisation scheme ended in March 2016, industrial properties have been actively purchased for redevelopment purposes given the rising office demand. According to the Lands Department, the number of redevelopment and wholesale conversion cases executed in June was 113, an increase of 26% YOY. The supportive government initiatives will further drive up prices and rents of industrial properties while industrial space will dwindle away in the future, especially in Kowloon East and Kowloon West.