1)  Hong Kong home prices rise on aggressive financing


News 
New residential projects released for sale over the weekend (10th- 11th September) saw massive over subscriptions and sold-out responses from local flat buyers. Among the key residential projects, Sun Hung Kai Properties sold the entire stock of its Grand Yoho project in Yuen Long, even after adjusting its asking prices up by 20% to a level of HKD15,000 (USD1,923) per sq ft since the project debuted in the market one month ago. In Tseung Kwan O, property developer ChinaChem’s director of sales Ng Shung-mo also said the company had fully cleared all its stock of two-bedroom units at its The Papillons project by 3pm Saturday, just a few hours after the flats were put up for sale. Buyers’ responses were reportedly enthusiastic. ChinaChem sold 70% of its 311 units released there. (Source: SCMP, 10 September 2016)

Research view 
Local developers continue to offer greater incentives, such as proposing aggressive financing schemes, in an effort to speed up sales. The current financing scheme offered by developers has an attractive term that generally lasts for 3 years and they would expect home owners to switch to alternative financing thereafter. At present, given a mortgage rate roughly at 2.5% and the overall mass residential yield around 3%, the premium of buy-to-let investment is not so appealing.

Home prices have seen growth in recent months, with the rate of decline tapering off to 6.4% since their September 2015 peak. It compares with a decline of 10.7% between September 2015 and April 2016. The prospects for a further downward price correction remains consider the potential interest rate increases following the lead of the US over the next few months and an ample pipeline of new apartments about to come on the market. We believe residential prices will continue to fall going forward but at a slower pace and the downward cycle should be longer than expected.


2)  Kiu Fat Building in Sai Ying Pun sold for HKD648 million

News  
A Chance Advance, a wholly owned subsidiary of Pioneer Global Group Limited (i.e. Gaw Capital), acquired the whole of lower ground floor, 1/F and 2/F at Kiu Fat Building, located at 115-119 Queen’s Road West in Sai Ying Pun, for a total of HKD648 (USD83) million. The purchase price represents approximately HKD11,420 (USD1,464) per sq ft  with a rental yield of 2.5% based on passing rents. (Source: HKEX, 8 September 2016)

Research view  
The investor would take it as an opportunity to remix or reposition of the asset, to diversify by exploring new retail concepts and seeking to attract a broader mix of retail tenants including more food and beverages outlets, art galleries and co-working space operators, in order to achieve a higher yield of around 5%.   

3)  Leasing activities in Wong Chuk Hang have picked up over the last two months

Agency view  
As the completion of Wong Chuk Hang MTR Station is getting close, leasing activities have picked up in the last two months. For example, Hogg Robinson Group has leased 9/F at Vertical Square, 21/F & 22/F have been leased to an investment company and furniture company, with face rents between HKD18.5 and HKD23 per sq ft (Gross). 41 Heung Yip Road has leased out 5 floors in the low zone at low HKD20s to three companies, including a local tenant from nearby buildings, a PRC manufacturer firm and a non-governmental organisation (NGO). Currently, there is another party negotiating five floors in this building.

 

ansion 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.