1)  Restructuring at top Western banks while Chinese institutes expand their footprints in for Hong Kong

News 
With today’s low interest rate, slow growth and rising regulatory costs, the golden age of the banking industry is fading since the early 2000’s.  In such a choppy environment, costs are one of the few things a bank can control and these come primarily from the workforce.  Across Europe, bankers are packing up.  In Britain more than 10% of bank jobs were cut between 2011 and 2015; in Germany the workforce has shrunk by around 20% since 2001.  On the company level, ING from the Netherlands, Commerzbank from Germany, Credit Suisse from the Switzerland, and Barclays from UK have all announced further cuts this year. (Source: Economist, 8-14 Oct 2016)

Agency view 
With increasing RMB outflow in amid of currency depreciation against USD, more PRC asset management companies are setting up new offices in HK.  We are currently assisting new mainland companies with office requirements ranging from 3,000 to 10,000 sq ft in core business districts.

Research view 
We are seeing signs of stagnating demand for office spaces in Hong Kong, particularly from tenants in banking & finance sector.  News about job cuts and operation restructuring at major finance institutions, such as Bank of America, Barclays, BNP Paribas, Deutsche Bank, Goldman Sachs, ING and Standard Chartered demonstrate the increasing challenges faced by major finance institutions around the world. Going forward, these challenges could have direct impacts on their demand for office space.  These could manifest in the market through downsizing or by opting for more cost effective solution such as decentralised locations by these tenants.

2)  Latest land sale a shot in the arm for Wong Chuk Hang office market

News 
The Lands Department has announced the result of the government land sale of Wong Chuk Hang’s commercial site that Sino Land and Empire Group Holdings outbid other 23 bidders at a consideration of HK$2.53 billion.  The transaction translates into an accommodation value of HK$8,872 per square foot, a record price of commercial land on Hong Kong Island.  It is estimated that the 19,000 sq ft site will provide a maximum gross floor area of about 285,000 square foot. (Source: Lands Department, HKSAR)

Valuation and Advisory Services view 
The Lands Department has announced the result of the government land sale of Wong Chuk Hang’s commercial site that Sino Land and Empire Group Holdings outbid other 23 bidders at a consideration of HK$2.53 billion.  The transaction translates into an accommodation value of HK$8,872 per square foot, a record price of commercial land on Hong Kong Island.  It is estimated that the 19,000 sq ft site will provide a maximum gross floor area of about 285,000 square foot. (Source: Lands Department, HKSAR)


Research view  
With the expected completion of South Island Line, we have noticed an increase in inquiries for office space in Wong Chuk Hang.  The area is attractive to tenants due to two major reasons.  First, with monthly net effective rent of HKD 32 per sqft, Wong Chung Hang is cheaper than other major decentralised submarkets such as Island East an Kowloon East.  Second, it is conveniently located within 15 minutes of travelling distance from the CBD which is closer than other decentralised submarkets.

3)  Chinese buyers snatch up properties in Hong Kong with new RMB depreciation expectation

News 
Since RMB inclusion in the SDR from 1 October, 2016, the rate of depreciation has picked up.  With US interested rate hike in December expected and new property restriction policy implemented in Chinese cities, more Chinese are interested in Hong Kong’s stock and property markets.  According to Bank of America Merrill Lynch, the number of mainland Chinese buyers for primary and secondary housing market has increased to 25% and 16% in 2Q, a new high since the implementation of BSD. (Source: Hong Kong Economic Journal, 17 October, 2016)


Agency view  
The property investment market in Hong Kong continues to see good momentum with commercial, industrial and residential sectors recorded sizable transactions: 

•  For luxury residential – there is a market rumor that the 5 brand new houses in Chung Hom Kok (No. 44, 46, 48, 50 Chung Hom Kok Road and No. 1 Horizon Drive) developed by Shun Tak, has been sold at one lot at HK$1.8 billion, with average price at HK$68,000/sq ft through company shares transfer.  News has not been confirmed by the developer, but was posted by various media.

• Safer Industrial Building, 28 Sze Shan Street in Yau Tong was sold for HK$530 million. The building has three frontages and command partial sea view to the Lei Yu Mun typhoon shelter, and is also next to the residential plot that was won by Minmetals in August for an accommodation value of HK$7,068 psf.  Extending to a total plot ratio GFA of 156,509 sq.ft, the transaction of Safer Industrial Building represents an unit rate of HK$3,386 psf., which draws a good story of comparative value.

• The ex-Aberdeen Fire Station commercial land plot (AIL462) was sold for HK$2.528 billion to a consortium co-owned by Sino Land (60%) and Walter Kwok Ping Sheung, the ex-Sun Hung Kai Properties chairman and CEO (40%). With a total site area of 18,996 sq.ft and a total developable GFA of 284,945 sq,ft, this transaction represents an accommodation value of HK$8,872 psf., marking the record high in accommodation values achieved in Hong Kong land history.

Hong Kong investment market is well poised to see further increment in value, as the market are well supported by multiple source of buyers across a number of sectors.

Research view  
The property investment market has been hot since the delay of interest rate hike by US Federal Reserve after Brexit.  In Q3, the number of transactions over HKD 100 million has exceeded the total number for Q1 and Q2 2016 with the total investment amount exceeding HKD 31 billion.  Residential and strata-title office transaction have been particularly active in Q3.  With the capital outflow from China continues and RMB depreciation expectation, we expect the property investment market to remain active for the rest of 2016.

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.