1) 2017 Policy Address heats up industrial property market but is less effective on residential
In her first Policy Address last Wednesday, Chief Executive Mrs Carrie Lam announced to implement policies to rebuild the housing ladder for Hong Kong’s middle-class families through the “Starter Homes” scheme. The supportive policies include the exploration of wholesale conversion of industrial buildings into transition housing, together with a waiver of the land premium. Under the new “Starter Homes” scheme, monthly income-limits, which are an eligibility criterion for subsidised private housing, are about 30% higher than under the Home Ownership scheme. Details are due to be announced mid-2018 and the first batch of 1,000 units will be launched on Anderson Road, Kwun Tong. Moreover, the Green Form Subsidised Home Ownership Scheme (GSH), which is enabling tenants of public housing to become owners of public houses, first launched in October 2016, shall be included for future public housing developments. Some 4,000 new private residential housing units in Fo Tan and Sha Tin are planned to be converted into GSH units for sale in late 2018. (Source: The Chief Executive’s 2017 Policy Address, 11 October, 2017)
The number of “Starter Homes” units will be rather small as the Government is constrained by current land supply. It will take some time for private developers to negotiate with the Government to incorporate a Starter Homes provision in private development units, especially when agricultural land banks are involved. In the long-term, the GSH may help to lower the supply pressure in the public housing market. We believe that the GSH and the Starter Homes scheme will not have a major impact on the private housing market as units built under the Starter Homes scheme are likely to be different in design, quality, and amenities. However, it could help to reduce the supply pressure on “nano flats” when more low-income households get on the property ladder.
On the other hand, allowing industrial buildings to be converted into transition housing will further intensify the supply in the industrial market. It provides more options for investors to convert their industrial properties into other uses, which will support the investment demand and prices of industrial properties.
2) The heating investment market over the week
The investment market was active with several transactions being recorded over the week.
LVGEM (China) announced the acquisition of the development at 123 Hoi Bun Road in Kwun Tong, also known as 8 Bay East, from Wharf Holdings, for a total consideration of HKD9 billion (USD1.15 billion). Based on a total gross floor area (GFA) of 596,218 sq ft (55,391 sq m), the transaction represents a unit rate of HKD15,095 (USD1,940) per sq ft. It is marking the largest en bloc office acquisition this year so far. Meanwhile, Bloomberg reported that Li Ka-Shing’s CK Asset Holdings Ltd. had sold its 75% ownership in The Center to a Chinese-led group for HKD40.2 billion (USD5.15 billion). If the sale is confirmed, this will be the largest en bloc transaction in Hong Kong ever.
In the industrial market, Laws Group has acquired Maxwell Industrial Building for a total consideration of HKD1.39 billion (USD177 million). Comprising a site area of 19,180 sq ft (1,782 sq m) with a developable GFA of 230,160 sq ft (21,383 sq m), the unit rate was HKD6,039 (USD776) per sq ft. Meanwhile, Wong's Factory Building in Tsuen Wan was reported to be sold for HKD1.23 billion (USD158 million) to a local industrialist. Based on a GFA of about 285,000 sq ft (26,477 sq m), the average price was about HKD4,300 (USD553) per sq ft. The premises can be redeveloped into a residential building with a developable GFA of about 86,000 sq ft (7,990 sq m). The sale was the 20th en bloc industrial property transaction this year, compared to a total of 13 in 2016. (Source: HKET, 08 and 13 October 2017; hkexnews.com, 11 October 2017; Bloomberg, 16 October 2017)
Land Registry data shows that the number of non-residential property transactions increased 51.4% YOY in the first nine months of this year. Moreover, office and industrial property prices have risen 10.6% and 6.0%, respectively, year-to-date, indicating a strong investment market. Apart from local buyers being active, Chinese capital has maintained its purchasing momentum, in view of mentioned LVGEM’s acquisition, and Bank of China purchasing three properties for a total of HKD3.1 billion last month. Oxford Economics forecasts a real GDP growth of 3.5% for 2017 and 2.3% in 2018. The positive economic prospects should support businesses and the capital market in 2018.
3) Recent expansions underpin the strong recovery path of the jewellery and watch sector
It has been reported that the international jewellery brand Tiffany & Co. has pre-leased a large two-storey shop (G/F shop G8 and 1/F shop 108) at 1 Peking Road in Tsim Sha Tsui for expansion. The brand has committed to leasing the 3,549 sq ft (330 sq m) shop for a period of six years for a monthly rent of HKD6.48 million (USD829,753), translating into a rent of HKD1,826 (USD233.8) per sq ft per month. The lease agreement contains a yearly increase of monthly rent by HKD200,000 (USD25,610). The initial monthly rent Tiffany and Co. will pay is HKD280,000 (USD35,854) higher than the rental paid by the current tenant Cartier, representing a 4.5% increase. Tiffany & Co. is currently operating three stores in Tsim Sha Tsui and opened a 3,800 sq ft flagship store at Times Square back in 2013. (Source: HKET, 16 October 2017)
As a consequence of the downturn in retail sales, particularly in the jewellery and watch sector over the past two years, several high-end brands of this subsector decided to vacate their shops in prime-street locations to save operation costs. Currently the jewellery and watch sector is on a strong path of recovery, with retail sales of this subsector rising 10.2% YOY in July and August combined and 3.2% in the first eight months of this year compared to the same period last year. The upturn together with a strong market sentiment amid favourable income and job conditions has led to new leasing activities in this submarket. Despite further contractions of some high-end brands, we see expansions of several mid-tier brands including THOMAS SABO and Agatha. Due to steep rental discounts, brands can leverage adjusted rental levels. (Source: Census and Statistics Department)