1) Hong Kong Property Market to benefit from Strong China Growth

News

China reported stronger than expected economic growth for the second quarter of the year, two days after the country’s leadership concluded a big meeting with a fresh pledge to address financial risks. China’s economy registered growth of 6.9% against a year earlier, the National Bureau of Statistics said on Monday. The rate was unchanged from the first quarter and higher than the full-year target of 6.5%. Factory output grew 7.6% in June from a year earlier, the fastest pace in three months, while fixed-asset investment increased 8.6% in the first six months of the year. Retail sales rose 11% last month from a year earlier, the fastest pace since December 2015. (Source: SCMP, 17 July 2017)

Research View

A stronger China growth is good news for Hong Kong’s economy and property market. Riding on strong China demand, the local export industry has improved since the beginning of the year with a growth of 8.3% in export value from January-May. We expect the export of services to China will rise as well. Brighter economic prospects offer a solid foundation for current property price levels. During H1 2017, Grade A office prices on Hong Kong Island went up by 6.6% and achieved new record prices. We are seeing landlords seize the current favourable market conditions to explore opportunities for disposing of large-scale properties. For example, the permanent owners of the Excelsior Hotel and Langham Place Office Tower have put these properties on the market out of a high expected return.

2) New offices, cheaper rents, and improving accessibility lure tenants away from Central

News

New office supply through a redevelopment programme in Island East is attracting a growing number of traditionally Central-based businesses. Reasons for more MNC occupiers from Central to relocate to Island East are more affordable offices, with discounts being as high as 50-60% for Grade A offices compared to Central together with modern office space. Unlike some of the most expensive buildings in Central, most offices in Island East are less than 20 years old. The trend is expected to continue as rents are likely to remain at a discount to Central due to consistent large-scale office supply in Kowloon East and the increase in accessibility once the Wan Chai-Causeway Bay bypass, scheduled to open in 2018, is completed. (Source: SCMP, 14 July 2017)

Agency View

New office buildings outside the core-CBD on Hong Kong Island, including projects like Lee Garden Three, 18 King Wah Road and One Taikoo Place, are increasingly attractive to MNC tenants from the core-CBD amid steadily rising rents in core Central. Factors including more attractive lease terms offered by landlords, like rental caps, options to renew, and rights of first refusal, are making it extremely beneficial to tenants given the tight market conditions. In recent months, new office space in Causeway Bay has absorbed tenants from the core-CBD, including banks, securities, and serviced office providers. We expect relocations to continue as the completion of the Central-Wan Chai Bypass next year will facilitate the drive among tenants to explore new buildings outside the core-CBD.

Research View

The increasing number of office (re)developments in Island East and also Kowloon East will continue to draw more MNC occupiers into decentralised districts. As of June 2017, occupiers in Island East enjoyed a 57% rental discount over the Grade A offices in core-CBD. The rental discount over Central Grade A offices should remain at a comparable level for the coming two years. The increasing provision of serviced apartments (e.g. by Swire), hotels (e.g. Hotel VIC) as well as entertainment, retail and F&B options in the area will complement the new office supply and attract more tenants to relocate. Further improvements in accessibility through the completion of the Island Eastern Corridor Link, which is scheduled to open in early 2020, will give an extra boost to the attractiveness of Island East.

3) Local developers secure project pipelines via speeding up land premium negotiation

News

Sun Hung Kai Properties (SHKP) has reached a land premium settlement with the Hong Kong government for a commercial-residential site in Tuen Mun with a price tag of HKD6.53 billion (USD837 million). The site, yielding a total gross floor area of 2.3 million sq ft, represents a land premium of HKD2,800 per sq ft, which represents the largest land premium paid since 2011. The residential project is expected to build 4,600 to 5,700 small to medium sized units with a unit size of 400 to 500 sq ft. Taking into account the land cost, the total cost would be HKD7,300 per sq ft, or nearly HKD17 billion (USD2.18 billion). (Source: SCMP, 14 July 2017)

Valuation View

The recently executed lease modification by way of exchange at Tuen Mun Town Lot No. 483 in Siu Hong, Area 54 is the largest modification transaction since 2011 in terms of the amount of premium. The premium of HKD6.53 billion (USD837 million) will allow residential and commercial developments to be built by a local developer, Sun Hung Kai Properties. Local developers expedite lease modifications to their land banks, showing that they have confidence in the growing residential market. In addition, Chinese developers have been actively engaged in the bidding for residential plots in urban areas. Agricultural land banks in the New Territories have become an alternative source of land supply for local developers to build new accommodations in the market. With the improvements in infrastructure, especially the Tuen Mun – Chek Lap Kok Link, demand for residential flats and home prices in Tuen Mun should both stay strong.

Research View

The settlement of the deal at a record price between SHKP and the government indicates a stronger will from leading local developers to maintain a stable stream of flat supply by way of land premium negotiation. Given that all five residential sites sold by public tender this year were outbid by mainland developers, there are greater incentives for local developers to utilise their own land banks other than relying on government land sales. On the other hand, we expect medium-sized developers who do not have a large agricultural land bank will have to rely more on redevelopment projects to maintain their market shares.