1)  Citibank Plaza has been renamed as Three Garden Road


Agency view (Hong Kong Office Services)
A landmark Central building has been renamed. Effective from 1st July 2016, the formerly named Citibank Plaza has been titled Three Garden Road. The secondary naming right for one of the two towers, Citibank Tower, has also been renamed as Champion Tower, to align branding with that of the REIT, which owns the building – Champion REIT. This in itself is a market indicator of western banking & finance occupiers losing their dominance in the Central Hong Kong district and choosing more cost effective real estate as an alternative. Citibank are releasing a further 45,000 sq ft over three floors in the building, relocating some staff to their recently purchased development in Kowloon Bay. Contrary to this, ICBC Bank retain their secondary naming rights of ICBC Tower in Three Garden Road and are expanding in the building which has seen circa 50% upward rental reversions in the past 18 months.


2)  Office leasing deals focusing on smaller occupiers in the next 12 months


Agency view (Project Management)
Despite the weakening of Chinese renminbi against the US dollar, following Brexit, we are anticipating little to no impact on demand for Grade A office space on Hong Kong Island by mainland PRC financial institutions. With no significant change in the new office supply landscape, and the continued demand from the mainland PRC’s, we are anticipating the office leasing markets in Hong Kong will continue, largely underpinned by more smaller transactions and fewer larger transactions for the second half of 2016 and through the first half of 2017.


3)  Spotlight on Landmark East

Agency vew (Kowloon Office Services)
Further to the confirmation of a sizable office relocation from AIA Kowloon Tower of Landmark East, the landlord of this building has been receiving consistent viewing appointments – both potential in-house expansion/relocation and new lease applicants from other districts. This suggests a strong demand of Grade A offices in Kowloon East, which was also anticipated from our mentioned forecast. In the second half of 2016, we expect Grade A offices in Kowloon East would remain a strong focus in comparison to other districts across Kowloon. It is in our view that landlords would need to be both very reactive and competitive in order to be less pressured in face of increasing supply in the market.


4)  Hong Kong retailers being offered cheaper rents and shorter leases, even for prime sites

News
Landlords of ground-level shops not only slash rents significantly, but also offer extremely short tenancy periods, even in prime locations. Cosmetic chain Colourmix just renewed its 1,500 sq ft street-level shop at Hanley Building in Tsim Sha Tsui for another three months at a monthly rent of HKD500,000, about 17% lower than its previous three-month leases. Colourmix took up its first three-month agreement in March for HKD600,000 a month, about 67% less than the HKD1.5 million a month paid by the former tenant, Emperor Watch and Jewellery.

Similar examples of three-month leases, falling in rent, are being extended to foreign brand in Causeway Bay, too. Korean high-end optical store Gentle Monster has just opened its first flagship store — The Platform — in Hysan Development’s 1,800 sq ft retail shop at 25 Lan Fong Road, Causeway Bay. (Source: SCMP, 7 July 2016)

Research view
Colliers Research is forecasting rents of street-level stores in prime shopping locations could fall 20% between now and 2018, back to the rental level in 2009, with a rental premium between prime high-street and malls in decentralized locations at 364%.
 

likely to be stable over 2016, with expansion from 2H 2017

Agency view (Strata-titled Sales)
In the past week, 4/F at No.9 Queen’s Road Central was sold for HKD370 (USD47) million, or a unit price of HKD 27,000 (USD3,462) per sq ft, with sales and lease back condition. Sales activity of strata-titled offices should remain steady is the near term.

Research View
We expect Hong Kong office property yields to stay at about 3% over most of 2016, and only to start expanding once US interest rates start rising sharply. Despite deteriorating business confidence, we believe capital values in office property will hold up well for two reasons. The first explanation is that real interest rates in Hong Kong (currently about -2%) will stay negative for some time yet, since interest rates in the US – which Hong Kong rates follow closely as a result of the currency peg – look set to rise gradually rather than rapidly. The second reason is the simple fact that too much capital is chasing too little stock in the Hong Kong office property market. However, we expect office sector capital values to start declining in 2H 2017, by which time real interest rates should have returned to positive territory. This change should cause office property yields to start expanding.


3)  Office yields likely to be stable over 2016, with expansion from 2H 2017

Agency view (Strata-titled Sales)
In the past week, 4/F at No.9 Queen’s Road Central was sold for HKD370 (USD47) million, or a unit price of HKD 27,000 (USD3,462) per sq ft, with sales and lease back condition. Sales activity of strata-titled offices should remain steady is the near term.

Research View
We expect Hong Kong office property yields to stay at about 3% over most of 2016, and only to start expanding once US interest rates start rising sharply. Despite deteriorating business confidence, we believe capital values in office property will hold up well for two reasons. The first explanation is that real interest rates in Hong Kong (currently about -2%) will stay negative for some time yet, since interest rates in the US – which Hong Kong rates follow closely as a result of the currency peg – look set to rise gradually rather than rapidly. The second reason is the simple fact that too much capital is chasing too little stock in the Hong Kong office property market. However, we expect office sector capital values to start declining in 2H 2017, by which time real interest rates should have returned to positive territory. This change should cause office property yields to start expanding.