1)  CBD2 at Kowloon Bay keeps adding new anchor tenants in finance/insurance sector

News 
JP Morgan announced it would establish a major presence at Link REIT and Nan Fung Development’s 77 Hoi Bun Road office complex. The bank is set to occupy about a quarter of the 82,116 square metres of gross floor area on offer as it looks to create a branded office. The financial services giant reached an agreement with Link REIT and Nan Fung Development to pre-lease 225,000 square feet (20,900 square metres) over several floors in the complex, which is under construction at the Kwun Tong intersection and due for completion in 2019. Kam Shing Kwang, JP Morgan’s senior country officer for Hong Kong, stated that the firm would keep its Asia Pacific headquarters at the Chater House building in Central while using the new Kowloon East as space to expand its operations. (Source: Mingtiandi, 20 November 2016)

Agency view

Cost containment is a theme that has become more prevalent over 2016. Exacerbated by the chronic lack of supply on Hong Kong Island, occupiers are now beginning to buck the traditional trend of assessing their real estate requirements 6 - 12 months out and are now beginning to explore options as early as 18 months prior to their lease expiry – particularly MNCs from Europe and the US. This is notion is not only limited to large companies with sizeable footprints, as Colliers has seen tenants under the 10,000 sq ft mark adopting similar practices. One of the key benefits of tackling the real estate requirement early is that it enables occupiers to forecast and budget ahead for the future, whilst maintaining transparency of available stock in a fast and dynamic market. More specifically, this extra lead time allows for occupiers to source options and pre-commit to them prior to being released on the market.


Research view 
While tenants’ affordability is being tested in the core-CBD area, there are signs of weakening demand for office spaces, particularly from the banking & finance sector. Consequences in the market could include decisions to downsize or to opt for more cost-effective solutions such as decentralised locations. We expect more consolidation and decentralisation for the banking and finance sectors with the upcoming supply of quality office spaces in decentralised locations.

2)  No sign of turnaround in Hong Kong retail market

News 
US fashion chain Abercrombie & Fitch will close its four-storey flagship store in Central as early as next year amid the economic downturn and a slump in shoppers from the mainland. It claimed the move was “part of the -company’s ongoing strategic review” and “was expected to drive economic benefit over time”. The 25,600 sq ft store on Pedder Street first opened in 2011. It has initiated an early exit before its lease expires in 2019 and the closure of the store should be “substantially complete” by the end of the second quarter of fiscal year 2017. There would be no Abercrombie & Fitch branded store in the city after, but the company intended to add five stores on the mainland by the end of January. (Source: SCMP, 20 November, 2016)

Agency view  
Hong Kong continues to suffer retail woes. However, we continue to see opportunities for “retail-tainment”, all-day F&B dining concepts, and creative lifestyle gadgets growing steadily.

  • Greyhound Cafe & Wang Jia Sha have taken a new lease on G/F-1/F in Tang Lung Street, Mid-town in Causeway Bay, totalling 10,000 sq ft. 
  • Burberry successfully renewed its shop at Silvercord Centre, one of the prime shops on Canton Road/ Haiphong Road. The adjusted rental is almost a half of its previous rent. 
  • Harbour City is adding a 30,000 sq ft F&B extension targeting creative F&Bs at affordable price points.

Research view  
Although the latest GDP growth for Q3 2016 was better than expected, particularly with a stronger private consumption increases and higher imports, up by 1.2% and 2.4% YoY respectively, total retail sales still decreased by 9.6% for the first nine months of 2016. Given mainland tourist arrivals continue to decline and soft consumption with Renminbi depreciation, retail rents in prime tourist locations are still facing downward pressure. According to Colliers’ research, rent at high-street shops has declined by 9% so far in 2016.


3)  Local developer sends upbeat signal on urban land values after new stamp duty


News 
Wheelock Properties has won the first residential site offered for sale by the government since the introduction of a new stamp duty, paying a higher-than-expected HKD6.388 billion. The land sale is seen as a test of the market’s sentiment as it is the first government site offered for sale since the introduction of the new stamp duty, which became effective on November 5 and the result demonstrated developers’ confidence in the residential market. Wheelock won the site after beating 11 bids from developers and it has plans for a residential development mainly comprising two-bedroom to three-bedroom units, providing a total area of 826,546 square feet. (Source: SCMP, 16 Nov 2016)

Valuation view  
Wheelock Properties successfully won the government land tender for the residential site at Sin Fat Road in Kwun Tong this week since it last gained the residential site in Kai Tak in 2014. The Kwun Tong land sale translates into an accommodation value of HKD7,729 per square foot, which is slightly higher than the market’s expectation. Owing to the new stamp duty set at 15%, a local developer won the public tender for a residential site in Kowloon East. The result reveals that local developers are still looking after the right opportunities in the market. While in our opinion local developers are more prudent than the mainland China developers on land valuation, they are more resilient against expected residential market downward pressure.

 

ansion from 2H 2017


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.

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.