1)  Flexible workspace operators continue to set their footprints in Hong Kong


Agency view 
The market continues to see demand in new openings from flexible workspace operators. We calculate these operators have secured 252,000 sq ft of space in Hong Kong over the first five months of 2016 alone. As the concept of flexible workspace has moved steadily into the commercial mainstream, larger companies including multinational corporations (MNCs) have become more willing to accept it. This is partly because flexible working space offers large companies an alternative to committing themselves to long leases – an option which is especially attractive in times of economic difficulty. Another reason is that a number of MNCs are moving “Innovation” Teams to be closer to start ups to tap into the talent pool and technology.

Research view 
Flexible working operators will take up 475,000 sq ft of office space under new leases in Hong Kong in 2016 by our estimates, then this year they will occupy space equivalent to 1.3% of the total office stock in the core and fringe CBD areas of Hong Kong. While this may not sound like a high proportion, at the margin it should be sufficient to ensure that demand for office space remains very firm. In turn, this factor should ensure that vacancy levels remain low and ultimately underpin rent levels.


2)  Retail sales fell 8.9% in June 2016

News  
Hong Kong retail sales fell for the sixteenth straight month in June. Total retail sales value declined 8.9% YOY in June to HKD 33.7 billion, data by the Census and Statistics Department showed. The value of sales of luxury goods, such as jewellery, watches and clocks, decreased 20.4% YOY. (Source: Census and Statistics Department)


Agency view  

As the luxury sector continue to slow down in the HK retail market, we see some of the key leading jewellery operators adopting cost savings strategy by keeping their presence on first tier high street at a much lower rental.  A listed goldsmith operator renewed its space successfully in Central at almost 60% rental reduction.  This not only shows the street landlords are more negotiable with existing tenants who intend to renew but also the fact that the rental was at a crazy peak before the retail plunge in 2014.  We will continue to see high street landlords becoming more flexible on rents whilst grade A mall landlords continue to explore and bring in traffic driver labels that are still fresh in HK or first time entrants from overseas.  Both landlords are adapting to a more sustainable approach whist going through the transformation phase of the HK retail market, hence we don’t expect to see a tremendous increase in vacancies than what we have already seen, over the next two quarters.  


Research view 
The retail market is undergoing a rapid transformation. We reaffirm our forecast that rents of prime high-street shops will fall by 10% in 2016, following a 24% decline in 2015. We expect retail rents will hit bottom in 2017.


3)  Industrial site was sold for HKD833.8 million

News  
Billion Development won the tender of an industrial site at Wing Kei Road in Kwai Chung for HKD833.8 million, or an accommodation value of HKD2,200 per sq ft. At this price, it was 27% below market expectations. (Source: Lands Department and various sources)


Research view  
In an attempt to alleviate the supply shortage pressure on industrial buildings, this is the second industrial site the government put up for sale. The previous industrial land sale happened in February 2015, when Shun Hing Group won an industrial site in Kwai Chung for HKD499 million, or an accommodation value of HKD3,472 per sq ft. This parcel of land was the first industrial site sold by the government since March 1998.

With growing demand for industrial premises, the shortage of industrial space is likely to continue for years to come. The floor space available for warehouse, including cargo lift warehouses on upper floors and those on the ground level, will diminish. Meanwhile, demand from data centre operators for high-ceiling industrial premises will intensify the competition for high-quality warehouse premises.
 

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.