22 June 2017
1) Local banks has yet to raise the lending rate after the latest Fed rate rise
The Hong Kong Monetary Authority raised its base rate by 0.25 percentage points on last Thursday morning, following the US Federal Reserve’s overnight move. However, none of the city’s major lenders has made the first move in raising the prime lending rate, ever since the base rate started rising in December 2015, as they have readily available funds, while competitive pressure compels them to maintain low mortgage rates to borrowers. But as the interest rate differential widens between the Hong Kong dollar and the US dollar, capital outflows will increase which would lead to tighter liquidity, and this would put pressure on banks to raise interest rates. Still, deep-pocketed buyers had been packing property sales to snap up new apartments, with some buyers purchasing multiple units. The city’s average home prices have soared for many consecutive months to a record, making Hong Kong the world’s most expensive major urban centre. (Source: SCMP, 15 June 2017)
Although the Hong Kong dollar is pegged to the US dollar and interest rates typically move in line with the US, Hong Kong still has ample liquidity available in the local banking system to hold the prime rate unchanged. Home buyers so far have been immune to any US interest rate hikes as the impact on the affordability of home mortgage payment is insignificant. However, we should be aware of the increasing new supply in the next few years. Developers may offer discounts on the sales price to clear up the inventory and to have cash back as soon as possible. It is anticipated that the residential price will continue to rise at a modest pace in the coming months.
Given the current abundant liquidity and low interest rate environment, the yield spread will be further compressed, especially for office properties in the core-CBD areas as the latest strata-title office transactions have all been on the higher side. A recent record-breaking transaction at World Wide House has achieved an average price of HKD36,000 psf with a very low gross yield at 1.7%. However, we have sensed some hesitation from buyers regarding the current price level. The market could slow down in H2 while buyers and sellers reassess their positions. A moderate price increase is still possible for the second half of 2017.
2) Retail property sector seeing more interest from PRC investors
Investors have started to look into the retail market again with the expectation of the recent decline approaching the end. According to market rumours, a Mainland Chinese investor recently acquired a shop on the ground floor at 32-34 Haiphong Road in Tsim Sha Tsui for HKD300 million. The 830 sq ft shop was transacted with an attic. Based on the total gross floor area of 1,660 sq ft, the average price was about HKD180,723 per sq ft. Meanwhile, the owner of the Kowloon City Plaza had told Hong Kong Economic Times on the 9th of this month that a mainland supermarket chain was interested in purchasing the shopping mall which was valued at approximately HKD5 billion. (Source: Hong Kong Economic Times, 15 June 2017)
We expect the retail market to improve further, given the value of total retail sales has increased for two consecutive months compared to the same period last year. The recovery of visitor arrivals, particularly the Mainland Chinese, has supported the positive growth of sales of luxury goods, (jewellery, watches, clocks & valuable gifts) which increased 1.4% year-to-date in April. According to the Rating and Valuation Department, the price index for private retail properties has increased for four consecutive months since January this year after declining for 13 months in a row, with the YOY increase accelerated to 2.7% in April. While the majority of Chinese investors have been focusing on office properties, retail properties should now become more attractive to investors given a positive outlook on retail prices while retail rents are approaching the end of a downward cycle.
3) Growing number of smaller-sized flats as housing price keeps rising
An application has been filed with the Town Planning Board for the redevelopment of two warehouse buildings in Cheung Sha Wan into residential and commercial uses. The proposed development comprises eight residential towers with a building height ranging from 40 to 44 storeys, providing a total of 3,140 flats. Compared with the previously submitted scheme which was subsequently withdrawn in 2010, the current scheme proposed a 30% reduction in average flat size (from 908 sq ft to 609 sq ft), resulting in a nearly 90% rise (from 1,692 to 3,140) in the total number of flats produced. (Source: Hong Kong Economic Journal, 17/18 June 2017)
Small flats are on the rise as Hong Kong home size shrinks amid high property prices. The Rating and Valuation Department and the Development Bureau are predicting that nearly half of all new flats next year would measure less than 400 sq ft each. Smaller flats are particularly popular among first time buyers who would otherwise be priced out of today’s high-priced property market. The price of small flats has been rising the fastest the last few years. However, investors could be exposed to more downside risk when the market adjusts itself and prices could drop more significantly than larger-sized flats.