1)  Capital Market: Hong Kong the safe haven for investors after Brexit


Research view 
After a relatively slow start, our outlook for the Hong Kong investment market has become more positive. While Brexit’s impact on different foreign currencies is still unfolding, we expect more capital to flow back into assets dominated in safer currencies, e.g. US dollar, Hong Kong dollar and Japanese Yen. Declining bond yields and extension of negative interest rate have made property a more attractive investment category. Anecdotal evidence points to rising enquiries for core properties with strong interest in offices. We expect more activities in the second half of 2016, especially if owners prove willing to be flexible on price.


2)  Shopping centres weather the storm better


Agency view 
Both shopping mall and high street landlords are coping and responding to the new demand in the market. Some landlords of malls in core locations are continuing to revamp the tenancy mix and structuring flexible lease terms to brands, which can enhance the shopping experience for consumers. Street landlords are increasingly negotiable on rental terms and flagship shop owners are becoming more creative to welcome short-term leases. Pop-up stores are much more popular nowadays especially the gimmick operators which landlords can use to draw in traffic and receive some rent in preference to leaving space empty without affecting the asset's long-run rental positioning. 

Research view 
The weakening in retail sales performance affects rents for prime-street shops more than the shopping malls in Hong Kong. Mid-range affordable fashion/accessory brands, sportswear, creative lifestyle and modern beauty retailers are expanding steadily at the adjusted rentals. For some of the second tier streets, the tenant mix is transforming more towards niche retail brands and local food and beverage. Wharf has said sales in its two major shopping malls - Harbour City in Tsim Sha Tsui and Times Square in Causeway Bay - have stabilised after plunging in the first quarter, according to the Hong Kong Economic Journal on 14 July 2016. Wharf has not cut rents and many retailers are consolidating their flagship stores in Harbour City while reducing outlets in other areas.


3)  Strong office demand around MTR Stations across Kowloon

Agency vew  
We are still seeing strong demand for offices located close to MTR stations across Kowloon albeit in a low vacancy environment. Currently, there are no whole single floors available in buildings with direct access to MTR stations.  This suggests tenants will be forced to look further afield for availability. Colliers believes this trend will persist as we are witnessing these new lettings in buildings, especially higher grading that locate in close proximity to public transports.


Research vew  

Kowloon East will make relocation more feasible for occupiers, considering that a total of about 6 million sq ft of commercial office space will be completed in Kowloon East in the next five years. The high rents and high fit-out costs in Hong Kong Island CBD now pose a major challenge for companies seeking large office spaces. Kowloon East, as a new decentralised office hub, should offer significant cost savings for occupiers.


4)  Wellness in the workplace

Agemcy viws
The ability to measure, wellbeing in the workplace has long been debated by designers, psychologists and end users alike. The ROI benefits of an organization investing in programmes that promotes an employee’s wellbeing to stimulate higher productivity and efficiency, which in turn drive improved bottom line performance, have been difficult to truly quantify.

The “WELL Building Standard”, founded by New York based firm DELOS, now provides end users with a platform based around technology, consulting, research, design and innovation, to create spaces in the built environment that nurture health and wellbeing in a way that is now measurable. The WELL Building Standard focuses on the concepts of air, water, nourishment, light, fitness, comfort and mind in order to promote health behavior, create satisfied and engaged employees that in turn drive better performance.

Similar to the USGBC LEED Certification programme that has now become popular as a means of achieving a firms Global Corporate Social Responsibility initiatives, the WELL Building Standard certification programme is the next big thing that’s becoming popular in the USA, Europe and Australia, with Asia following suit. We are already seeing multinational companies are particularly interested in this new certification standard and questions are being asked of the project teams to see if they are aware and can incorporate the certification in to the project design and planning of their new office premises.

 

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.


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.