1)  Big ticket transactions have emerged in the office investment market


News 
Prosperity REIT has agreed to acquire a 24-storey commercial building at 410 Kwun Tong Road for HKD1.875 billion (USD242 million), or a unit price of HKD12,951 (USD1,660) per sq ft based on a total floor area of 144,780 sq ft. This transaction represents a passing yield of slightly over 3%, which is in line with the current overall Grade A office yield at 3.0%. In addition, Henderson Land has agreed to sell its Golden Centre office building, a 24-storey building in Sheung Wan, to an undisclosed buyer for HKD4.4 billion (USD564 million), according to a filing made to the Hong Kong Stock Exchange. The unit price at HKD28,205 per sq ft is based on a gross floor area of about 156,000 sq ft. The sale is expected to be completed by 1st December 2016, the filing said. (Source: Mingtiandi, 13 September 2016; SCMP, 15 September 2016)

Research view 
As expected and in line with our predictions earlier this year, more big-ticket transactions have emerged in the office investment market in recent months. Multinational companies continue to widely assess the feasibility of purchasing for owner-occupation as a long term strategic move that optimises liquidity, rental affordability and risk management. We expect the aforementioned trend will continue in the next 12 months and we will not be surprised to see more record-breaking deals in the foreseeable future.


2)  Enhanced Trend of the split of the operation from core central to other commercial areas

Agency view  
Several big banks have further split their operations from high-rent areas in Central and other prime areas to decentralised districts. For instance, Citibank, originally an anchor tenant in Three Garden Road (formerly Citibank Plaza), has confirmed that it will give up three floors along with the naming right and relocate to its self-occupied building in Kowloon East. Standard Chartered Bank has also sublet some space in Two IFC and Standard Chartered Bank Building. Bank of China has moved some of its operations from Central to other commercial areas and put the floors in the market for lease. Meanwhile, Mizuho, originally in Pacific Place in Admiralty and The Gateway in Tsim Sha Tsui, has also confirmed that it will lease floors in the new building in K11 in Kowloon.

Research view  
With top office rents in Hong Kong’s Central district among the highest in the world at around HKD122 per sq ft per month, more companies are looking for more affordable locations in the territory.  This has sent an important message to the market as these big banks are targeting other areas for their operations and we expect to see other banks and financial institutions follow a similar approach in order to save cost. This will be beneficial to the new office supply in other business areas, for example, Lee Garden Three in Causeway Bay, the Ex-Asian House re-development in Wanchai, One Taikoo Place in Quarry Bay, as well as many more buildings in Kowloon East with good specifications and competitive rental packages.   

3)  Carter's expanding in Kwun Tong

Agency view  
As Clothing companies in the baby/kids sector have been enjoying some growth in recent quarters. Carter’s Inc., a public listed US company, which also known as William Carter Company, has recently concluded an office expansion transaction in Millennium City 6 in Kwun Tong. The building is currently trading at around HKD 30–HKD 35 (USD 3.8–USD 4.5) per sq ft (Gross). The seventh floor was previously occupied by Farrington American Express Travel Services, who was surrendering and hence releasing around 15,000 sq ft (Gross) of space to the market. Carter’s will be taking possession of the unit starting in November 2016.

Research view  
Kowloon East has become a popular alternative business address, with asking rents in the area ranging from HKD25 – HKD35 per sq ft per month. While there will be a stream of new office supply in Kowloon East over the coming years, we do not expect that rents in Kowloon East will decrease sharply. We suggest that large occupiers should develop a more forward-looking real estate strategy to incorporate new opportunities offered in decentralised locations.
 

ansion 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.