1) Competition among developers has driven up residential land premium

News

Kerry Properties and Sino Land have won the tender from MTR Corp for the second phase of development adjacent to the Wong Chuk Hang MTR station. The 92,269 sq ft (8,575 sq m) site is expected to deliver two residential towers, offering a total of 600 residential units with a total GFA about 492,991 sq ft (45,817 sq m). Homes built on the site could be sold at more than HKD30,000 (USD 3,846) per sq ft, or at least HKD15 million (USD1.9 million) for a 500 sq ft, two-bedroom unit, when they are completed by 2023. (Source: SCMP, 5 Dec 2017)

Research View 

Land premium at Wong Chuk Hang MTR Station has increased by 30% in the last 11 months: from HKD8,100 (USD 1,038) per sq ft for phase one development in Jan 2017 to HKD10,500 (USD1,346) per sq ft for phase two development in Dec 2017. This is just the latest instance of a series of high land premium paid for the Government and URA land which signals developers’ unabating appetite for new development sites. We believe urban areas served by new infrastructure and undergoing urban regeneration will continue to attract strong interest. Competition will gear up among local and PRC developers who do not have a large farmland reserve and need to replenish their land banks.

2) Wing Tai sold Winner Godown Building to Billion Development for HKD2.16 billion

News

Wing Tai Properties announced the disposal of the Winner Godown Building, an industrial building in Tsuen Wan, for HKD2.16 billion. The buyer, Sunny Global Development Limited, which is reported to be related to Billion Development, is paying HKD4,350 (USD557) per sq ft based on the gross floor area of 497,100 sq ft (46,182 sq m). It marked the largest transaction of an en-bloc industrial building in Hong Kong. (Source: hkexnews, 5 December 2017; HKET, 6 December 2017)

Agency View

The building was the third en-bloc industrial building that Billion purchased in Tsuen Wan over the past two months. We believe that industrial buildings purchased by institutional investors have a high probability to be redeveloped into new industrial or office buildings. We predict industrial buildings continue to attract more private or institutional investors amid positive investment sentiment.

Research View

Despite investors being on high alert for any black swan events in the region such as geopolitical conflicts, Colliers Hong Kong Investor Survey 2017 shows that half of the respondents consider themselves as “net buyers” while only 3% consider themselves as “net sellers”. About 64% of respondents have expressed their intention to invest in en-bloc or strata-title industrial properties. We are bullish about industrial price growth for 2018, expecting a 5-10% increase, subject to the details of the Hong Kong Government’s forthcoming new revitalisation scheme for industrial buildings. Overall, we consider a potential global or regional financial market downturn, prompted for example by high equity valuations, to be the greatest risk to investment property markets in 2018. We ascribe a 35% probability to this scenario.

3) Favourable rents for lease renewals in primary high-street locations

News

The Swiss watch brand Swatch has renewed the lease for one of its outlets, a corner shop, located at 2 Kai Chiu Road in Causeway Bay. The current lease of the store, spanning a total of 3,000 sq ft (280 sq m; G/F and 1/F) will expire in May 2018. The current rental amounts to HKD3.15 million (USD404,000) per month. Tenant and landlord have reportedly reached a new lease agreement with a monthly rental of HKD2 million (USD256,140), representing a discount of 36.5% to the previous lease terms. (Source: HKET, 7 December 2017)

Research View

Lease renewals with significant discounts continue to put pressure on retail rents in primary shopping districts. While first-tier streets, like Russell Street in Causeway Bay are fully leased except for one or two small units, secondary streets, such as Lee Garden Road, still have a higher number of vacancies. With the retail sector recovery at an early stage, retail rents outside prime locations will probably remain stagnant for a while whereas rents for prime locations are starting to rebound. We expect a more stratified rental market where the rent gap between first-tier and secondary streets within the same district will be widening in 2018.