1)  Pacific Basin relocates their entire operation to Wong Chuk Hang


Agency view 
Whilst there have been several notable transactions in Wong Chuk Hang, with AXA and Mizuho Bank likely to take space in Vertical Square, the recent announcement of Pacific Basin, a global shipping company, relocating to the 31st floor of One Island South has the potential to be a critical moment for Wong Chuk Hang. Until this point, the trend has been towards retail, design and IT firms taking up space in the district, with larger MNCs and financial institutions relocating back office functions to the south side of the island. The Pacific Basin move goes against this trend because the company is relocating its entire operation to the south side of the island, making it the first major MNC to commit itself wholly to the district. This is certainly a significant transaction for the district but it is unlikely to lead to a sudden mass migration as many companies continue to hesitate.

Wong Chuk Hang has seen growing number of enquiries yet many remain undecided. A lack of amenities, coupled with continued uncertainty over the completion date for the new South Island MTR line, remain significant considerations for MNCs and financial institutions. Landlords offer additional incentives to mitigate such factors, especially buildings with high vacancy rates. The kinds of incentives on offer go beyond simply low rental rates. Both 38 South Side and 41 Heung Yip boast a dedicated lift lobby for anchor tenants, and naming rights are subject to negotiation for selected buildings. These incentives combined with an increasing number of high profile transactions will undoubtedly increase interest in the area.

Research view 
The current amount of office property in Wong Chuk Hang (an existing stock of 1.4 million sq ft NFA) is yet to reach critical mass and make it a minor office node, which requires a minimum of about 2 million sq ft. Wong Chuk Hang will offer cost savings for occupiers and will have much-improved transportation connectivity in the near future. The neighbourhood should become more attractive to corporate occupiers as the portfolio of offices, retail, hotels and serviced apartments improves.


2)  Investors eye on strata office floors

Agency view  
The market has been filled with optimism by the high sale prices achieved for office floors in the CBD in the week ending 12 August 2016. Ming Fai International sold the 5/F at Grand Millennium Plaza in Central together with two car parking spaces for HKD263 (USD34) million or HKD17,022 (USD2,182) per sq ft, according to the company’s announcement dated 2 August 2016. Mseanwhile, the 32/F at Far East Financial Centre, owned by Korean Exchange Bank, was under close negotiation for sale, at a price of around HKD310 (USD38) million, or a unit price of HKD30,000 (USD3,846) per sq ft, according to market rumours.


Research view 
Our outlook for the Hong Kong investment market has become more positive and we expect more capital to flow back to assets denominated in safer currencies, e.g. the US dollar, Hong Kong dollar and Japanese Yen. Declining bond yields and the persistence of negative real interest rates have made property in Hong Kong a more attractive investment category. As Chinese renminbi depreciation fears linger and with limited office towers available for sale in Hong Kong, we foresee PRC firms, perhaps smaller ones, will consider seizing the opportunity to purchase strata-titled offices to be their headquarters.


3)  Mainland Chinese tourist arrivals grow for the first time in 13 months

News  
Mainland tourist arrivals showed an uptick in July for the first time in 13 months, according to the latest preliminary statistics by the Hong Kong Tourism Board. The number of mainland Chinese visitor arrivals increased 2.2% year-on-year (YOY) and helped push the overall arrival figure back into positive territory, growing by 2.6% YOY in July 2016. Although the return of visitors may be good news for retailers, tourists are spending less in Hong Kong, with the overall tourist expenditure dropping 14.6%, from HKD7,598 (USD974) to HKD6,492 (USD832) per person in 1H 2016. Similarly, Mainland tourist expenditure fell 15.8% from HKD8,445 (USD1,083) to HKD7,105 (USD911) per person. The Tourism Board kept its full year forecast for Hong Kong tourist arrivals at a decline of 1.8%, representing an improvement from the 10.7% fall last year. (Source: Singtao daily, 10 August 2016)


Research view  
The retail market is undergoing a rapid transformation. We reaffirm our forecast that rents of prime high-street shops will fall by 10% in 2016, following a 24% decline in 2015. We expect retail rents will hit bottom in 2017.


4)  Residential land was sold at above market consensus

Agency view  
On 8th August 2016, a joint venture between Hong Kong Ferry and Walter Kwok Ping Sheung, the ex-chairman of Sun Hung Kai Properties, won the government tender of a residential site at Tuen Mun Town Lot No. 547 for HKD2.7 (USD0.35) billion, or an accommodation value (AV) of HKD4,086 (USD524) per sq ft. The site is close to Harrow International School of Hong Kong. On the same date, Sun Hung Kai Properties snapped up a residential plot at Sha Tin Town Lot No. 609, located at To Shek in Sha Tin, for HKD2.36 (USD3.0) billion, or an AV of HKD5,448 (USD698) per sq ft . Both lands were sold at prices above the top end of market expectations. We expect flats need to be sold at above HKD10,000 (USD1,282) per sq ft in order to achieve a reasonable profit.


Research view
In early August, a mainland developer paid HKD4.0 (USD0.5) billion, or an AV of HKD7,068 (USD906) per sq ft, for a residential site in Yau Tong. At this price, it is 40% above general market estimates. The arrival of mainland developers has added additional competition to local developers, as mainland developers tend to be more aggressive in land bidding, while local ones are more conservative in pricing. The proportion of mainland buyers within all winning land bids has now jumped to 41%, with China Vanke, China Overseas Land and Investment, and Goldin Financial making large acquisitions worth between HKD1.3 (USD0.12) billion and HKD6.3 (USD0.81) billion, which combined are likely to provide more than 3,700 units, according to Mizuho Securities Asia as stated in the SCMP on 12 August 2016.

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.