2) Kai Tak site sets new record to support future property price
Chinese conglomerate HNA Holding Group has outbid 20 rivals to win its second residential site in Kai Tak for a record HKD13,600 per sq ft, with a bid of HKD5.41 billion, 24 percent to 38 percent higher than the market expectation of HKD2.98 billion to HKD4.38 billion (HKD7,500 to HKD11,000 per sq ft). The industry expects HNA to offer the units built on the site for around HKD22,000 per sq ft in order to generate a reasonable profit. In September, apartments at the One Kai Tak development, built by China Overseas Land & Investment, were transacting for HKD18,500 to HKD20,000 per sq ft. (Source: SCMP, 20 December, 2016).
While residential sales prices have continued to increase after the new stamp duty measures, the immediate impact has been the shrinking of transactions volume. However, we have seen increasing numbers of luxury transactions purchased by wealthy individuals who are classified as “first time buyer” and are exempt from the new stamp duty.
We re-affirm our view that the new stamp duty will have an immediate impact on shrinking transaction volume, but only a mild impact on dropping residential price. Given the latest interest hike and the expected new supply, private mass home prices will stay flat in the short term as the majority of owners are not desperate to sell, while developers will offer more incentives such as mortgage financing and discounts on stamp duty for primary home buyers. However, we believe that prices will decline gradually over the coming 12 months with the majority of investors staying away from the local property market. Based on previous rounds of stamp duty increases, we believe the mass market and luxury market prices will decrease by 5 percent and 8 percent for the next 12 months respectively.
3) Luxury brands downsizing continues as Hong Kong’s retail slump bites
Prada, the Italian luxury fashion brand, follows Ralph Lauren and Burberry in scaling back as the flow of free-spending mainland visitors decreases. Prada will close its boutique at the Peninsula hotel shopping centre on 31 December in the latest sign that the retail slump is hurting high-end brands. With fewer wealthy mainland Chinese shoppers visiting the city, analysts warn more luxury stores could fold after expanding too rapidly in the past decade. Premium lifestyle brand Ralph Lauren quietly closed its 20,000 sq ft store in the Causeway Bay shopping hub overnight earlier this month, and British fashion house Burberry is to cut the size of its biggest Hong Kong flagship store in Pacific Place by 50 percent within the next financial year. Retail sales of luxury items in the city such as jewellery, watches and clocks, and valuable gifts slumped 19.7 percent in the first 10 months of the year. (Source: SCMP, 15 December, 2016)
While the retail market continues to be stagnant in Hong Kong due to a drop of tourist’s arrivals (thereby weakening purchase volumes and sales values) we are excited to see the potential sales performance in the coming Christmas and New Year peak season. The relatively small decline in total sales value in October YOY, allow us to be more confident that the retail performance in November and December may also be similar and hold through to the beginning 2017.
We see the growing demand and popularity of trendy luxury than traditional luxury. International luxury brands that are new to the market or existing luxury brands that do not have multiple flagship stores in HK are able to sustain in the current market condition with a healthy P&L. We may see further closure of traditional luxury brands on first tier high streets in 2017. Usually these brands have aggressively opened too many flagships with high lump sum rental value in the past. On the other hand, luxury brands would not prefer to leave their key performance shops / grade A mall locations as they don’t want to run the risk of not being able to get back in when the retail market picks up.
Hong Kong's total retail sales have been suffering since mainland tourist arrivals in Hong Kong started weakening in 2014. Consequently, the retail landscape has shifted from expenditure by tourists to expenditure by local residents. The share of local consumption in total retail sales has increased from 58 percent in 2014 to 67 percent in H1 2016; this is the same proportion as in 2012. We expect that prime street rents will continue to slide by single digits through 2017 as luxury brands are replaced by new shopping and F&B concepts catering for local consumers.