1) High rents and office decentralisation fuel developers’ expansion outside the core CBD

News

Swire Properties has applied for a compulsory sale under the Land (Compulsory Sale for Redevelopment) Ordinance for Wa Ha Factory Building and Zung Fu Industrial Building in Quarry Bay for an estimated total value of HKD5.76 billion (USD740 million). Located at 8 Shipyard Lane, Wa Ha Factory Building provides a developable floor area of 406,000 sq ft (37,720 sq m) for commercial use on the 27,000 sq ft (2,510 sq m) site. The building has an estimated value of HKD2.96 billion (USD380 million). The 15-storey Zung Fu Industrial Building located at 1067 King’s Road has a site area of 25,000 sq ft (2,325 sq m) and can be redeveloped to a commercial building comprising 373,000 sq ft (34,655 sq m). With both buildings close to Quarry Bay MTR station and office towers owned by Swire, the redevelopment of both buildings will provide good opportunities for Swire to further enhance its portfolio.  (Source: Hong Kong Economic Times, 7 February 2018)

Research View 

Developers have been actively expanding their portfolios outside of the CBD to capture the rising office decentralisation trend due to record-breaking rents and low vacancy rates in Central. In Wan Chai South, Hopewell plans to expand its portfolio by redeveloping the old residential buildings at 153-167 Queen’s Road East into a 115,200 sq ft (10,700 sq m) office building. In addition to the completion of the Lee Garden Three office tower, Hysan plans to improve the connectivity within its portfolio in Causeway Bay through new bridges and tunnels. Island East should gain stronger traction with the expansion of Swire’s portfolio and the upcoming completion of the Central-Wan Chai Bypass and Island Eastern Corridor Link. The improvement of office quality and connectivity on Hong Kong Island should drive the decentralisation of financial institutions and professional services firms, while Central continues to attract PRC companies.

Agency View 

Supported by a lack of options, trophy assets are driving record rents in the CBD, with landlords expecting monthly rentals of HKD190-200 (USD24-26) per sq ft net. Pre-commitment of quality stock is a “must”, with occupiers over 20,000 sq ft (1,858 sq m) being advised to analyse and negotiate options 18 months prior to expiry. Landlords are willing to commit to terms early, but will only do so for “desirable covenants.”

2) Slowdown of mainland Chinese investments in Hong Kong as investors become more selective

News

Following Chinese capital controls and tighter scrutiny on overseas investments, mainland developers accounted for only 11% of land tenders in FY2017 in Hong Kong, compared to making up almost half of all land tenders in FY2015 and FY2016, according to a S&P Global Ratings report. On the other hand, since Chinese developers have no land banks in Hong Kong, they have been trying to build up their land reserves aggressively in past years by keeping land cost buoyant, compressing margins for investors. The report also warned that the increase in property prices may not fully offset the land cost for developers. It is expected that Chinese developers will continue to purchase land in Hong Kong, but with a more selective and strategic approach. (Source: SCMP, 6 February 2018)

Valuation View

There are several options for mainland developers to obtain land in Hong Kong. Beyond government land tenders, Chinese developers may also opt for redevelopment projects of urban land, or purchase a site or project from other developers. President Xi Jinping’s statement that homes are for living and not for speculation may also have influenced mainland developers’ decision to invest in Hong Kong, thus giving local developers some room to rebuild their land banks. Local developers have been pushing up land prices, indicating that they expect the housing market to remain positive in the long run.

Research View

Chinese investors have been active in both site and property acquisitions in recent years. According to Real Capital Analytics (RCA), total property transactions in 2017 from PRC investors in Hong Kong valued at over HKD78 million (USD10 million) amounted to around HKD55 billion (USD7.0 billion), up by 3.4% YOY. While most PRC investments went to development site acquisitions in H1 2017, their investment focus shifted back to office acquisitions in H2 2017. Chinese investors were again behind the largest acquisitions, spending HKD24.9 billion (USD3.2 billion), or about 47% of the total Hong Kong office transaction value during Q4 2017. Although we expect Hong Kong to remain popular for PRC investments, we think Chinese interest in “One Belt, One Road” countries, especially in Southeast Asia, will pick up gradually from 2018 onwards. 

3) Novel F&B concepts are popular with locals who are shifting away from traditional tastes

News

According to the Census and Statistics Department (CSD), the value of restaurant receipts in Q4 2017 was provisionally estimated at HKD29.7 billion (USD3.8 billion), representing an increase of 6.6% YOY. Broken down by type of restaurant, total receipt value of non-Chinese restaurants increased by 7.2% YOY, followed by Chinese restaurant and fast food shop receipts which rose 6.8% YOY and 5.2% YOY, respectively. In 2017, the total restaurant receipt value grew 5% YOY, reaching a provisionally estimated total value of HKD112.7 billion (USD14.4 billion). The receipt value of non-Chinese restaurants grew strongest, recording 6.3% growth YOY, while those of Chinese-restaurants showed with 3.8% YOY the smallest growth rate. (Source: Census and Statistics Department, 5 February 2018)

Agency View

The secondary market was active in Mid-levels and Central in January 2018. There was a total of 15 transactions recorded in The Land Registry in January. The highest transaction in Mid-levels Central was the 3/F in Century Tower Block 2, sold for HKD105 million (USD13.5 million), or HKD36,790 (USD4,729) per sq ft based on a net floor area of 2,854 sq ft (265 sq m). The second-highest transaction was Flat 23C in Tregunter 3, sold for HKD69.2 million (USD8.9 million), or HKD29,322 (USD3,769) per sq ft based on a net floor area of 2,360 sq ft (219 sq m). Vendors in this location have become less open to negotiations due to strong investment demand.

Research View

We expect the strong leasing activity of the F&B sector to continue in 2018, given strong local market fundamentals such as a full-employment situation, a favourable income situation, and returning tourists. The F&B sector showed continued growth of the restaurant receipt value throughout the past decade. Notably, restaurants serving international cuisine are becoming more popular and local restaurant groups featuring innovative F&B concepts continued to expand throughout 2017. Although Chinese restaurants are still generating the largest share of the overall restaurant receipt value, their market share has fallen from 48% to 44% over the past ten years. Non-Chinese restaurants, fast food, and other F&B outlets such as Bubble Tea shops are gaining ground among younger generations.