1) Hong Kong needs to strengthen the super-connector role as more PRC businesses go global

News

Despite being the leading city of The Pearl River Delta (PRD), China’s most dynamic, open and innovative region, Hong Kong is wondering about its future while welcoming the 20th anniversary of the handover. The PRD is home to nine mainland cities in the Guangdong Province as well as to the two SARs – Hong Kong and Macau. Though the PRD accounts for less than 1% of China’s territory and 5% of its population, it generates more than a tenth of its GDP and a quarter of its exports. The World Bank recently declared the PRD the world’s biggest megacity, surpassing Tokyo. For all the local anguish, it is worth remembering that Hong Kong is the freest economy on Earth. The city’s commitment to international legal and accounting norms has made it a global financial centre and is the leading offshore centre for trading the yuan and the conduit of much of the foreign investment undertaken by mainland firms. Hong Kong’s best future is to remain as China’s super-connector to the world. (Source: The Economist, 8 April 2017)

Research View

Hong Kong’s status as the leading city of the PRD has been challenged by neighbouring cities, especially Shenzhen and Guangzhou. High business cost, high cost of living, and a stagnant economic performance have dampened business confidence. However, we believe Hong Kong will remain a key player in the PRD in the foreseeable future. In the near term, Hong Kong’s economic growth will continue to accelerate gradually, while Chinese economic growth, which has recently beaten most expectations, will remain strong. Looking forward, given a wealthy and dynamic economic hinterland in the PRD, the demand for sophisticated services from Hong Kong will continue to grow. The city’s status as the preferred international headquarters of large PRC companies should be further enhanced under the “One-Belt, One-Road policy”. Having said that, Hong Kong has to increase its capacity to accommodate future demand and capture new opportunities by expediting infrastructure and land development processes under the new administration.

2) Falling exports have prompted the apparel industry to further cut real estate cost

News

The value of total exports and imports of goods for the first two months of 2017 increased by 6.7% and 9.3% respectively compared with the same period in 2016, led by machinery and parts, and telecommunications equipment. However, a decrease was registered in the value of total exports and imports of "articles of apparel and clothing accessories", with a decline of 14.9% and 13.0% respectively. (Source: Census & Statistics Department, 27 March 2017)

Agency View

The rising cost of raw materials and labour costs are the top concerns for apparel sourcing businesses in the year 2017. Cutting real estate cost remains the major agenda of the apparel sourcing industry. However, it is crucial for the industry to stay in the same location to retain customers. In Tsim Sha Tsui, one of the apparel companies in Gateway Towers has recently committed to another Grade A office building in the same area. In Cheung Sha Wan, a garment company has relocated to another building within the same neighbourhood. We foresee that the apparel sourcing business will continue to reduce headcounts while looking for a more cost-effective real estate solution in the same district.

Research View

Hong Kong’s economy has moved at different speeds over the last two years. While high value service sectors, such as finance and insurance, real estate and professional services, have been growing at a healthy rate of 3%-5% per year, import/export sectors have struggled because of a weak global trade environment (although this is now improving). The garment and apparel industry has been one of the most cost-conscious sectors of office rent. We expect the apparel business will continue to look for cheaper office alternatives while the consolidation phase for the industry continues.

3) Fringe retail spaces to benefit from strong local consumption despite weak retail sales numbers

News

Retail sales fell by 3.2% in the first two months of the year even though more tourists visited the city. Although the number of visitors to the city rose 1.4% over the two months, retailers have yet to see a boost in business. Per capita spending by overnight visitors fell from HKD7,234 in 2015 to HKD6,602 last year. The Tourism Board is predicting a further 5.2% decline to HKD6,256 this year. A few categories showed resilience: sales of medicine and cosmetics increased by 2.7% in the first two months while food, alcoholic drinks and tobacco were up 1.4%. (Source: South China Morning Post, 30 March 2017)

Research View

The number of tourists has started to increase again over the past couple of months after experiencing decline since June 2015. However, it will take more recovering time for the number to create a positive impact on the local retail industry and high-street rents. On the other hand, we continue to see retail properties catering for local customers on the fringe of core-CBD areas are faring much better. For example, many retail properties in the Western District are repositioning themselves to cater for the influx of middle-class and expatriate customers since the completion of the MTR Island Line extension. We expect that rents and capital values for retail properties close to MTR stations in the Western District will continue to rise as the revamp of tenant mix at key retail podiums continues.