1)  Investor appetite for properties in Kwai Chung


Agency view (Capital Markets and Investment services)
Hanison Construction acquired PDC Tower, a 4-storey industrial building with revitalisation approval at 22 Yip Shing Street in Kwai Chung, for HKD150 (USD19) million. The industrial building translates into an average price of HKD7,079 (USD908) per sq ft, or an accommodation value (AV) of HKD2,757 (USD353) per sq ft. This deal followed the purchase of a commercial site at Kwai Chung Town Lot No. 522 in May 2016, by Sun Hung Kai Properties for HKD6,039 (USD774) per sq ft (AV). Another commercial site at Kwai Chung Town Lot No. 517 at Tai Lin Pai Road will be offered for sale with tender date closing in early July 2016. We expect land prices will continue to hold up well.

Agency view (Kowloon Office Services)
The transformation of Kowloon East is sprawling to Kwai Chung, given the critical mass of the Kwai Chung commercial is shaped by the completion of Kowloon Commerce Centre 1 & 2 by Sun Hung Kai Properties in 2008 and 2012, respectively. It has been further accelerated with the successful revitalisation of KC 100 and Life@KCC. Looking ahead, three more industrial buildings will be converted into office use, namely Gold Peak Building, Nan Sing Industrial Building and Toppy Tower, which indicates Kwai Chung is becoming a more popular destination for commercial development.
 

2)  Whole floor office space is still hard to find in Greater Central


Agency view (Capital Market and Investment Services, Hong Kong)
There are more options for small-to-medium size occupiers in Greater Central looking ahead, given that vacant space in these areas are usually smaller and there is an increasing amount of shadow space from surrender leases. Greater Central covers Central, Admiralty and Sheung Wan districts. Opportunities for large occupiers which usually require whole-floor or multi-floor space are still extremely slim. According to data from a global consultancy firm, Greater Central only has a total of 23 whole floor spaces available between now and the end of 2017, which adds up to a total of 233,000 sq ft, around 37% of all total vacant and shadow space. Only three of the available whole floor spaces have contiguous floors, one of which has a total area of less than 20,000 sq ft. Only 11 floors have a floor plate size of over 10,000 sq ft. (Source: SCMP, 14 June 2016)

Research view
Office leasing demand has slowed substantially since the beginning of January amid global market volatility and a lack of space. During the first five months of 2016, overall net absorption rate recorded a negative rate of 196,421 sq ft, compared with a positive rate of 686,404 sq ft in the same period last year. Grade A office rental growth is set to slow in 2016 subsequent to a 13% growth last year. We predict overall Grade A office rents to grow 5% in 2016, with Island East taking the lead at 9.0% this year, followed by Central and Admiralty (8.4%), Wanchai and Causeway Bay (6.4%) and Sheung Wan (5.0%). For 2017, we expect Grade A office rents in Greater Central to see modest growth in view of the continuing tight supply in the area.

3)  Goldin Finance Global Centre – The New Joiner

Agency view (Kowloon Office services)
Goldin Financial Global Centre in Kowloon Bay has re-confirmed their completion date to July 2016. In fact, there are a few negotiations on the table, primarily from tenants that are currently located in Hong Kong Island. The building allows sub-division with priority given to half floor subdivisions at around 17,000 sq ft. The achievable effective rental is from HKD25 per sq ft (Gross) onwards. We expect the building will be the focus as we progress to the second half of the year due to the recent take-up of AVNET in Megabox of over 68,000 sq ft (Gross).

Research View
Kowloon East should see stronger take-up than Hong Kong Island due to the sizable volume of new supply, where it can offer major cost savings for occupiers. We predict net absorption in Kowloon East will add up to 725,604 sq ft in 2016.


4)  Hong Kong retail rents yet to bottom out as landlords offer deeper discounts

News
Some shops in the retail complex Laforet at 24-26 East point Road in Causeway Bay are reportedly being offered for lease at rents that are up to 78% lower than the previous tenancy. It is rumoured that a 458 sq ft ground level shop in Laforet was leased for HKD120,000 (USD15,385) a month on a short term lease, down from the previous lease of HKD550,000. Besides, Jeweler Chow Tai Fook has agreed to renew its shop at the China Building in Central at a monthly rent of HKD1.8 (USD0.23) million, about 55% less than the previous lease. (Source: SCMP, 14 June 2016)

Research View
Among different categories of assets, the retail sector has been going through a significant downward adjustment since its last peak. We predict a further 10% drop in 2016 after a full year decline of 23.7% in 2015. With more vacant shops available, particularly in the Causeway Bay district, retail rents are tipped to slide to a larger degree.




 


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.


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.