18 May 2017
1) After a strong Q1 GDP growth, the Government remains cautious about growth prospects
Hong Kong’s economy grew by 4.3% in real terms in Q1 2017. External demand continued to strengthen as the global economic environment further improved. Domestic demand also held up well, supported by favourable employment conditions and more positive business sentiment. Looking ahead, the global economy is likely to gradually improve further and that the mainland Chinese economy is firmly on track to attain medium-to-high growth. Also, the recent revival in visitor arrivals, if continued, could give an extra lift to our exports of services in the period ahead. However, downside risks in the external environment, though receded somewhat, still warrant attention. These include the US interest rate normalisation, policy divergence among major central banks, Brexit-related negotiations, and various uncertainties surrounding policy and political developments in the US and Europe. Moreover, the possible rise of protectionist sentiment and elevated geopolitical tensions in various regions are also potentially destabilising factors. As the global economic outlook is still subject to various uncertainties, the forecast real GDP growth of 2-3% for 2017, as announced in the Budget, is maintained in the current round of review. (Source: Hong Kong Government, 12 May 2017)
Compared to 2016, Hong Kong’s economy has a more balanced growth in 2017: including a strong revival of the international trade and a bottoming out of the local retail sector. The total import/export value has seen a strong annual growth of 10.7% and 10.3% respectively during Q1. The retail sector has started to rebound following increasing tourist arrivals since the beginning of 2017. Retail sales in March rose for the first time in two years, although sales in Q1 were still down as a whole. The acceleration in growth is good news for all parts of Hong Kong’s property market, in particular for the retail rent. We expect rent at prime-street shops will decline by a moderate 5% in 2017 and there is a chance we will revise up our projection if retail sales and tourist arrivals strengthen further in the coming quarters.
2) The SAR leaders pitched for Hong Kong as the preferred financial platform at Belt & Road Initiatives
At the first day of the Belt and Road Forum for International ¬Cooperation, Hong Kong Chief Executive CY Leung ¬insisted the city was “the preferred destination” for capital flows from the mainland. Leung cited the city’s status as the largest offshore settlement centre for renminbi trade and its title as the world’s No 1 stock market for new listings in 2016. A key challenge facing Beijing’s ambitious trade strategy is establishing financial connectivity between more than 60 countries that sit along the trade route, and funding the infrastructure projects involved, with many already proven to be too high risk for some private investors. Hong Kong Monetary Authority chief executive Norman Chan said the authority’s office had already allied dozens of “like-minded stakeholders” and a big cluster of equity and debt investors for Belt and Road projects. (Source: SCMP, 15 May 2017)
During the latest Belt & Road Forum held in Beijing, President Xi pledged a further HKD880 billion (USD113 billion) via its state funds and banks to finance projects in the “Belt and Road ¬Initiative”. In addition, he reiterated China’s strong support for globalisation through an open economy and inclusive trade arrangements across participant countries. We expect more Chinese companies will invest in Belt & Road countries and Hong Kong has the advantage to facilitate their international business expansion. Office rent in Central should continue to rise due to the influx of new companies and the expansion of existing PRC companies, who have a strong preference for core-CBD presence. As a result, Quarry Bay and Wong Chuk Hang on Hong Kong Island ought to benefit from the departure of some MNCs and professional firms from Central.
3) New HKMA measures will not change the course of housing prices
The Hong Kong Monetary Authority (HKMA) will require banks to lower their caps on the amount they lend to developers for construction financing from 1 June 2017. Under the new measures, the maximum limit on bank loans used by the developer to buy a plot of land will be cut to 40% of the value of the site, down from the current 50%.
The cap on loans for the construction costs will come down to 80% from the current level of 100%. And the overall cap on bank financing for the whole project will be reduced to 50% of the expected value of the completed properties, from the 60% at the moment. In addition to limiting the amount loaned, the HKMA will require banks to add 50% more capital weighting on developers who offer total mortgage loans at an amount equal to more than 5% of their book value. For those developers offering mortgages valued at equal to or more than 10% of their book value or who refuse to provide the relevant information, banks will need to double the capital amount to back up the loans they are offering. This new requirement will start from 1 August 2017. (Source: SCMP, 12 May 2017)
More and more buyers in the primary market choose to borrow home loans from finance companies instead of banks while most of these finance firms are likely beyond the jurisdiction of HKMA. They are regulated by the Money Lender Ordinance which is enforced by the Commissioner of Police. As soaring home prices are driving the demand for high loan-to-value financing plans, it has become developers’ strategy to promote sales by offering mortgage financing with high loan-to-value ratios to buyers.
It is unlikely that the new HKMA measures will change the course of housing prices as large developers with strong financial backgrounds can finance the extra costs by alternative financing. For home buyers, the new measure means that they will have to rely more on their own resources to meet the down payment. According to the Government 2016 by census, the median mortgage payment to income ratios for private properties decreased from 28.6% to 19.0% between 2006 and 2016. Given strong economic growth and close to full employment, it is unlikely that household owners will default on their home loans. However, given the rapidly rising home prices, it is the large first instalment that has become the critical hurdle for potential buyers. Since the new measures will limit developers’ ability to offer high loan-to-value ratio mortgage plans, potential buyers will have to put up more for the down payment. The new measure may encourage developers to build smaller-size units with lower lump sum values.
4) Modest interest in Kowloon West land tender while the market is waiting for the tender result of Murray Road Car Park
The tender for a commercial site in Cheung Sha Wan has only attracted modest interest from developers while attention was focused on the Murray Road Car Park tender. The site in Cheung Sha Wan has been awarded to New World Development at a premium of HKD4.03 billion (USD520 million). The successful tender brings New World Development’s total investments in Cheung Sha Wan to HKD11.8 billion in less than three months. (Source: SCMP, 10 May 2017)
The office investment market continues to be buoyant the week ahead of the closing of the Murray Road Car Park tender. A low floor unit in Fairmont House was sold for HKD46.34 million with a unit price of HKD28,000 psf, which has set a new record for the building. Separately, a high floor in Tower 1, Lippo Centre was also sold for HKD472 million with a unit price of HKD33,500 psf, another record high for the building. In addition, New World’s winning bid with an accommodation value of HKD7,478 psf was also at the top range of market expectations.
The promising land and office sales in Lai Chi Kok reflect the market’s optimism about the future prospects of commercial property sector in Kowloon West. The first batch of 30 units at a newly revitalised industrial property called “The Globe” at Lai Chi Kok has been sold for HKD320 million (USD41 million) with an average price of HKD8,500 (USD1,090) per sq ft. In April, China State Shipbuilding Corporation invested HKD259 million (USD33.2 million) to acquire 23/F & 25/F of 650 Cheung Sha Wan Road together with the naming right. The average price of HKD19,000 psf (USD 2,440) was a new record high in Kowloon West. This transaction also indicates that non-financial PRC companies are targeting decentralised business districts.