1) Coping with high office rent, office space in Kowloon West is getting more popular
New office supply in Kowloon East in recent years (revitalised/newly built) has drawn tenants’ attention as an alternative location for back office operation. We have heard that an electronic advance payment company has recently chosen to put its future “Call Centre” space in a revitalised office building in Kowloon West. Since Kowloon West’s average net effective rent is lower than other locations, we anticipate that more sizeable transactions for tenant’s relocation to Kowloon West will continue.
We believe office rent in Hong Kong’s core-CBD area will continue to rise amid steady demand, limited supply and a vacancy rate hovering at about 2% at the end of 2016. In contrast, new supply of Grade A and revitalised offices will keep office rent at decentralised locations, such as Kowloon East, more affordable for tenants. With the rental gap continuing to grow, we expect Grade A office rent will increase 4% and decrease 7% for Hong Kong Island and Kowloon respectively in 2017.
2) New stamp duty has been driving away foreign buyers from Hong Kong property market
Since the implementation of new stamp duty in November 2016, the number of double stamp duty transactions in December dropped by 84% m-o-m for residential properties to 376 cases. On the other hand, non-residential properties increased by 48% m-o-m to 3,904 cases. The total number of Buyer’s Stamp Duty has decreased to 145 cases, a drop of 70% m-on-m. (Source: Mingpao, 13 January 2017)
Since the Chinese Government imposed further restrictions on capital outflows at the end of 2016, mainland China investors have become less active in Hong Kong. In contrast, PRC buyers who are planning for their own use remain active. Unlike past years, they have become more interested in second hand properties in prestigious locations, such as the Mid-levels above Central.
The residential property market has become skewed towards the primary sales market since the imposition of different rounds of stamp duties. Considering that developers have greater capability to offer rebates to offset new stamp duty cost and aggressive financing schemes, we expect the number of primary market transactions to continue to rise in 2017 at the cost of the secondary market.
3) Competition for property mortgage loan intensified, but further reduction of actual lending rate is limited
The property mortgage market will remain very competitive in 2017, but there is limited room for further reduction of mortgage rates. The Hong Kong Interbank Offered Rate based (Hibor+) mortgage rate has decreased from H+1.7% in early 2016 to H+1.33% in early 2017. With further US rate increases probable, the cost of borrowing will move up in Hong Kong. However, the demand for housing in Hong Kong will still be strong, given continues economic growth and a stable employment market. As a steep decline in property prices is unlikely, banks will continue to divert more resources to the property mortgage market. It is estimated that the mortgage market will grow by 5% in 2017. (Source: Mingpao, 14 January, 2017)
The competition between local banks for mortgage loan business remains active at the beginning of 2017, and this is helping to offset the concern about US rate hikes on the local property market. HSBC and Bank of China have offered the lowest mortgage rate of 133 basis points above the Hong Kong Interbank Offered Rate, or Hibor, for loans of over HKD8 million. Based on the one-month Hibor of 0.74%, the effective rate will be reduced to 2.07% which is lower than the market best offer of 2.09% last December.
Other finance companies such as Centaline Finance, mReferral Mortgage and Ricacorp Mortgage are also active in the mortgage loan business, offering 120%-130% mortgage loan plans to lure property buyers. They offer an interest rate of between 6.25% and 6.75%, i.e. 1% to 1.5% higher than the rates offered by developers last year.