1)  Markets may be volatile for a while after the latest Black Swan event

News 
For the second time this year, investors have been hit by a political shock: first, the Brexit referendum; now, Donald Trump’s election victory. And the reaction has been very similar; a knee-jerk sell-off followed by a pause to consider whether there might be some profitable opportunities after all. Indeed, there is plenty of potential risk ahead. It is not just America that is grappling with the issues of slow growth and immigration. Over the next 12 months, Europe faces a constitutional referendum in Italy, a general election in Germany and a presidential election in France. Investors may thus face a no-win situation. Unless the share of GDP in the developed world shifts in favour of labour and away from capital, populists will be elected. And if populists are elected, and enact the protectionist and anti-immigration policies voters appear to want, not only might capital’s share of GDP fall, but GDP might grow even more slowly. The reverberations from Mr Trump’s triumph will echo far longer than over the first few trading sessions. (Source: The Economist, 12 Nov 2016)

Agency view

Hong Kong’s property market remains buoyant in the midst of Trump’s victory and the implementation of the 15% ad valorem stamp duty (AVD) for residential properties. We have received more enquiries from PRC domestic developers, looking for both residential and commercial investment opportunities in Hong Kong. Local developers with good primary sales market track records have started to revisit investment opportunities that they have turned from previously. We believe the flood of capital from mainland Chinese investors – aiming to denominate their assets in USD and HKD – and major PRC corporations who intend to be more active in Hong Kong are the key drivers for the latest flurry of investment deals.


Research view 
Donald Trump’s US presidential victory raises challenges for Asia, including a possible near-term hit to confidence and growth and new tariffs on imports. However, if US growth suffers under Mr. Trump, US interest rates may only rise gradually and the dollar may weaken. This outcome would support Hong Kong property assets, since it would mean the negative real interest rates persists.

2)  Hong Kong posted better than expected GDP growth number for Q3

News 
Economy grows 1.9% in third quarter from stronger domestic demand, employment and trade, an improvement over the first and second quarter growth rates of 0.8% and 1.7%, respectively. Despite the promising figure, the government set a conservative full-year growth forecast of 1.5%, compared to its previous range of 1 to 2%. Recent cooling measures announced for the city’s property market are expected to dampen short-term growth and were cited as one of the reasons for the cautious outlook. (Source: SCMP, 12 November 2016)

Research view  
We maintain our cautious optimism for Hong Kong’s economic prospects. In a global context, both the EU and the US are facing more uncertainties following Brexit and Trump’s election victory, whereas Asia as a whole looks more stable with China and India continuing to post strong economic growth metrics. Hong Kong’s economy has been resilient; while the wholesale and retail sectors continue to struggle due to lower tourist arrivals and changing consumption patterns, expansion in high-value service sectors and a recovery in the export/import balance will support the city’s economy growth in 2017. However, we do not see a very strong GDP growth in 2017 as Trump’s policies on trade are likely to hold down Asian growth overall, reflecting the recent IMF forecast for Hong Kong GDP growth in 2017 at 1.9%.


3)  Developers are expected to offer new incentives to counter the impacts of the new stamp duty


News 
Cheung Kong Property Holdings has become the first among Hong Kong’s developers to offer more incentives to property buyers a week after the government doubled the city’s stamp duty to control runaway prices. For a month until December 15, Cheung Kong said it will foot the bill for buyers who are liable for a 15% stamp duty on its exclusive The Zumurud apartments in Ma Tau Kok. (Source: SCMP, 11 Nov 2016)

Agency view  
Since the government has increased the AVD rates to 15% we have still seen some remarkable transactions this week in the luxury property sector, highlighted in a duplex unit sale in The Masterpiece (18 Hanoi Road, Tsim Sha Tsui) by tender at HKD155 million (HKD40,208 per sq ft). Even after an 8.5% rebate from the developer, the purchaser still has to pay HKD10.07 million in stamp duty. We believe that AVD will not affect much pressure on UHNW buyers, especially regarding special units or houses that are rare on the market.

Research view  
We expect the new rate will put some pressure on both private residential price growth and investment demand. Based on previous rounds of stamp duty increases, the immediate impact had been the decrease of transaction volume while the price was slow to respond. The number of monthly transactions for November and December could drop back to 2,000 units, the same level as January – February this year. Overall, the flat rate ought to have a bigger impact on the secondary market as the primary market is dominated by developers who would offer more selling incentives to offset the additional cost to buyers. We foresee home prices to stay flat in the short-term as the majority of owners are not desperate to sell, but to trend down over the coming years by 5-10% as investors stay away.


4)  MTR finally comes to Island South


News 
The long-awaited rail service between Admiralty and Southern district will start operating by the end of the year, although a specific opening date has yet to be set. The HKD16.9-billion line will connect South Horizons on Ap Lei Chau via Lei Tung, Wong Chuk Hang and Ocean Park. Rides from Admiralty to Ocean Park and South Horizons will take about four minutes and 11 minutes, respectively. The South Island line was initially scheduled to open in December last year, but the MTR announced in November 2014 that the opening would be pushed back six months due to excavation difficulties at Admiralty station. Last year, the opening was again postponed, this time to the end of this year. (Source: SCMP, 11 Nov 2016)

Agency view  
Following the start of South Island line MTR services to Wong Chuk Hang, we expect more occupiers moving to the district, illustrated recently in The Executive Centre’s decision to relocate its headquarters from 28 Hennessy Road to The Factory in Wong Chuk Hang, where it will occupy duplex floors of approx. 20,000 sq ft and assign part of their offices as a co-working space. They will be amongst the first flexible workspace operators in the district and we believe more will come especially after the official announcement of the MTR line’s opening. The current average net effective rents in the district is HKD31.9 per sq ft and we expect a significant rental growth of 19% in 2017.

Research view  
MTR connectivity helps to spur office rent growth. According to our research, rents in Sheung Wan increased quickly in 2014 and 2015, when compared to Wan Chai, due to the opening of the MTR’s Western extension to Kennedy Town via Sheung Wan Station. In the five years prior rents in Sheung Wan and Wan Chai had grown at a similar rates as both districts were CBD fringe. However, during the two years 2014-2015 spanning either side of the MTR line opening, rents in Sheung Wan outgrew Wan Chai by 12%. We believe that MTR connectivity could play an even more significant factor in the rapid office rent growth at Wong Chuk Hang in 2016 and 2017.


ansion from 2H 2017


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.

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.