1) San Po Kong emerges as the CBD fringe to Hong Kong’s second CBD
33 Tseuk Luk Street, a new development by Sun Hung Kai Properties with an office GFA of 217,600 sq ft will be available in Q2 2017. This will be the newest addition to the increasing Grade A office stock in the San Po Kong submarket that includes Stelux House, AIA Financial Centre and Max Grand Plaza. With the new addition, the overall Grade A office stock in San Po Kong will be just under 1 million sq ft.
San Po Kong, in Kowloon, has emerged as an up and coming district adjacent to Hong Kong’s planned second CBD. The submarket’s net effective rent reached HKD25.0 per sq ft per month, which is slightly below the district rents in Kwun Tong and Kowloon Bay that stood at HKD36.6 and HKD31.7 in November 2016. The district vacancy rate was at 39.9% in November 2016; the high vacancy is mainly due to the newly completed Max Grand Plaza that is being absorbed into the market.
Looking forward, Colliers Research believes San Po Kong has the potential to become a primary fringe office destination adjacent to Hong Kong’s second CBD. With planned transportation improvements such as the Shatin to Central Link and the Environmentally Friendly Linkage System (Monorail), San Po Kong is positioned for rapid transformation in coming years.
2) Millennials and changing tourism dynamics are reshaping Hong Kong’s retail landscape
Five product clusters have emerged as the new front runners of Hong Kong’s retail landscape. New F&B offerings, sports and outdoor brands, modern living, advanced skincare and “retail-tainment” products have increased their presence in shopping districts that were once occupied by high-end luxury brands.
Attesting to this trend, landlords are shifting their strategies to benefit from these new trends. For example, the upcoming Lee Garden Three project that boasts 90,000 sq ft (8,360 sq m) of retail space is planning to position itself to capture these trends by incorporating tenants from above clusters.
We have seen major landlords taking similar measures according to leading developers’ annual reports and a news article by the Standard on 4 July 2016. Swire Properties Limited plans to double its F&B footprint at prime Pacific Place Mall. The Wharf (Holdings) Limited has refined its tenant mix bringing in new F&B tenants and lifestyle and mid-range brands in its prime locations. In Harbour City, culinary upgrades on the third floor and a new area will be opened to offer more culinary options in mid-2017. At Times Square, we have observed refinements in the tenancy mix and establishment of a “Kids Zone” and “Lifestyle Hub” to capture the demand from earlier mentioned retail trends.
Replacing luxury brands with new F&B and lifestyle concepts will continue to put pressure on retail rents although the overall retail sales decline has slowed down in recent months. Given the continuing slump in the retail sector rent, Colliers Research expects the prime retail rents to drop between 5 and 10% and retail capital values to drop between 10% and 15% in 2017.
3) Q3 Quarterly Business Receipts Indices reaffirm the positive outlook for major office tenant industries
According to the Quarterly Business Receipts Indices for Service Industries (Q3 2016) compiled by the Hong Kong government’s Census and Statistics Department, the majority of major service industries demonstrated varying degrees of increase in Q3 2016 compared to Q3 2015.
Double-digit YOY increases were recorded in the insurance (29.4%) and real estate (19.9%) sectors, while modest growth was observed in banking (4%), finance (except banking) (5.2%) and professional services (2.1%). The retail sector faced a YOY decrease of 7.5%. This was the smallest YOY decrease for the retail sector following 12.5% and 8.2% falls in Q1 and Q2 of 2016. On a QOQ basis, Q3 was a positive quarter with just 0.5% decrease compared to 2.8% drops in Q2 2016. (Source: Hong Kong SAR Government, 9 December 2016)
Quarterly Business Receipts Indices are a solid indication of the short-term performance of these economic subsectors. As the statistics indicate, the positive performance of major office tenant industries such as banking, finance and insurance should support the demand for office market in the coming year. Insurance industry growth should be a major driver for office space demand in Kowloon East, where insurance tenants occupy around 8% of the total Grade A office stock.