14 June 2017
1) Soaring office rents have pushed for commercial site redevelopment on Hong Kong Island
The study from International Institute for Management Development places Hong Kong ahead of Switzerland and Singapore as the most competitive economy for the second consecutive year based on four indicators: economic performance; government efficiency; business efficiency and infrastructure. While Hong Kong topped the rankings on government efficiency and business efficiency, the city’s economic performance and infrastructure were lagging behind its major competitors. In addition, Hong Kong lost to Singapore, Sweden and the US in terms of digital competitiveness. (Source: SCMP, 1 June 2017)
Premium grade A buildings in Central and Admiralty are close to full occupancy with an achievable renewal rent climbing towards historical high. Demand for space by existing tenants has remained strong and the landlords are still aggressive on rent with the limited potential space. Having quality spaces with seaviews and premium building specifications at the heart of Hong Kong is an important “brand building” process for PRC companies in developing an international identity in front of their clients and business partners. This would perfectly explain the values that a premium Grade A office in Central will bring to a corporate and the historical high unit price at the land sale of Murray Road Carpark lot.
With an improved global economic outlook, the office rent in core-CBD areas is showing strong momentum in growth. While new office supply in decentralised locations offers reliefs to companies seeking for cost savings, Central still retains its appeals to international and PRC companies who wish to establish a strong presence in the region. According to Colliers’ research data, PRC companies accounted for nearly 25% of total new office space leased between January - May 2017. We expect office rent in core-CBD areas to increase by 4%-5% in 2017.
2) Investors targeting office and industrial properties despite compressed yields
Soundwill Holdings Limited announced the disposal of the majority portion of COHO, a residential building in Causeway Bay, for HKD455.6 million. Based on a saleable floor area of 15,326 sq ft, the unit rate was HKD29,688 per sq ft. Upon completion, COHO will provide 46 units with the range of unit size between 312 and 317 sq ft. Market rumoured that the buyer of the property was a Chinese investor. (Source: Hong Kong Economic Times, 7 June 2017)
Local and foreign investors have remained active, notably large properties have been increasingly sought after. The number of transactions with a deal size of HKD200 million or above increased to 54 transactions, compared to 44 transactions in 2016. The number of transactions with a deal size of HKD1 billion or above also increased from last year. The Wellington, an office building in Sheung Wan, was sold at HKD3 billion, which marked the largest transaction so far this year. In addition to Chinese investors continuing to stay active, foreign investment funds have been returning to the Hong Kong market from China due to the currency stability of Hong Kong dollar pegging to the US dollar.
Industrial and office properties have been more attractive to corporate real estate investors than residential properties due to a more certain rental outlook and lower stamp duty. While rents for street shops are still under downward adjustment, rents for office and industrial properties have marked the strongest growth in the property market. The shortage of supply, especially in the core areas, provides a sustainable growth of rental income for investors. Despite increasing interest rate, Hong Kong interest rate remains low, which will continue to attract investors amid the strong leasing market and the rising rents across the office and industrial market.
3) Think outside the box approach in boosting future residential land supply
The former president of the Hong Kong Institute of Engineers had put forth a suggestion to increase future housing land supply by building on top of the existing container terminals in Kwai Chung. Instead of relocating the existing container terminals, which is expected to take a long time to implement, the new approach will build flats directly on top of the cargo handling areas. The proposal would be feasible from an engineering perspective but will still need to work out the details with existing cargo terminal operators regarding the development right. (Source: Hong Kong Economic Journal, 10/11 June 2017)
The idea to co-locate a container port and residential buildings on the same piece of land, if proved engineeringly and environmentally feasible, would be a breakthrough that will not only be a new engineering achievement by itself but also will create a large piece of readily available space for development in a relatively quick manner. With a new administration coming in on 1 July, we believe more out-of-the-box thinking and a comprehensive housing strategy are needed to solve the long-standing housing issues.