1) Hong Kong tightens screw on borrowers of multiple loans as property market overheats

News

The Hong Kong Monetary Authority (HKMA) has announced the second set of mortgage-tightening measures in a week targeting borrowers of multiple loans whose income sources come from outside the city in an another attempt to cool the overheating property market. Commercial banks will have to allocate a larger risk weighting towards their assessment of creditworthiness, while cutting the amount of allowable loans on residential and commercial properties by decreasing loan-to-value (LTV) ratios by 10%. In addition, companies that are buying homes for corporate use have had their loan amounts cut to 40% of value, from 50%. (Source: HKMA; SCMP, 19 May 2017)

Research View

The new measures should have limited ability to slow price growth given that most property owners are financially strong. The primary market has been strongly supported by first-time buyers who are not affected by the new measures and the 15% ad valorem stamp duty. Large developers with strong financial backgrounds can also offer extra loans by alternative financing. The impact on the secondary market could be more significant in that investors who cannot borrow from developers using a high LTV ratio may shift to even smaller units.

2) Capital values and rents in Central to stay high after the Murray Road land sale

News

Henderson Land has bought the world’s most expensive commercial land plot in downtown Central, beating the mainland Chinese developers who had been dominating the city’s real estate purchases in the past year. The property giant will pay a record HKD23.38 billion (USD3.0 billion) for the government’s Murray Road plot which can be developed into a commercial building with 465,005 sq ft (43,200 sq m) of total gross floor area. The implied value of HKD50.640 per square foot is way above market expectations and professional valuations of between HKD15.7 billion and HKD22 billion. (Source: SCMP, 16 May 2017).

Agency View

The land sale of the Murray Road plot has marked the highest commercial accommodation value in the territory where the developer is paying a record price for the largest commercial plot that goes into the market in two decades. Recent transactions nearby have also shown signs of promising outlook for the investment market where a 12,108 sq ft (1,125 sq m) office unit in Lippo Centre was transacted at HKD475.3 million (USD61.0 million), marking a record high level for strata-title sale at Lippo Centre. We believe that that real estate capital appreciation in Hong Kong still has a long way to go.

Research View

Despite the lack of mainland Chinese interest in this tender, we expect the capital values and rents in Central to stay high due to strong underlying demand. The rental outlook for the district should remain bright given the low vacancy rate of below 2% amid a stable business sentiment outlook. New supply of commercial sites in Central will be rare until two sites of Site 3 by the harbourfront become available for public tender in 2018 and 2020 at the earliest. However, investing in properties in the core-CBD should remain popular despite the very high prices. In fact, the high expectations for the Murray Road site have already driven up prices in the vicinity, including two recent transactions of office units in Fairmount House and Far East Financial Centre at HKD28,200 (USD3,620) and HKD38,000 (USD4,878) per square foot respectively, both were at a record level.

3) Leasing demand growing outside Central

News

Swire Properties has reported its first-quarter results and saw positive results in the office sector. Swire's Pacific Place, Taikoo Place, and One Island East boast 100% occupancy rates, with rents climbing 15%, 10% and 1%, respectively. According to Swire Properties, western financial firms and banks, as well as professional services firms, are currently reviewing their cost structures and exploring opportunities outside Central, in places like Taikoo Place. Ince & Co., one of the UK’s top maritime law firms, which is in the process of relocating to One Island East, had commented that Central rent has become too expensive to justify with its business profit margin. (Source: HKEX; SCMP, 20 May 2017)

Agency View

New supply in districts outside Central provides a cost-saving consolidation option to occupiers. The market sees an increasing number of banks seriously considering consolidating their offices in Central, having started negotiations with landlords of offices in decentralised locations on Hong Kong Island. The absorption rate of new developments in Causeway Bay has also been quicker than expected, especially driven by sizable and quality occupiers of the most expensive buildings in Central, who look for cost-saving opportunities outside Central.

Research View

The new supply of quality buildings in decentralised locations offers attractive alternatives for occupiers who find that current rent in Central is beyond affordable level. However, it is not going to put much pressure on the district’s rental growth given the current vacancy rate in Central is below 2% and the expectation that space released by decentralisation can be quickly backfilled. Steady demand from PRC firms should underpin a positive space take-up in the short term.

4) Strong Demand for Quality Warehouses

News

Two floors of Ever Gain Centre, a warehouse building with direct lift access in Shatin, have been sold for a combined value of HKD360 million (USD 46 million). Each of the warehouse property involves a total floor area of 47,064 sq ft, which translates to an average price per square foot of HKD3,780. (Source: Singtao Daily, 22 May 2017)

Agency View

The market has strong demand for good quality warehouse spaces approaching the second quarter. There were several pre-leasing agreements being committed recently for a Tsing Yi logistics site with an expected achievable rent of HKD13 – 15 per square foot. There was also a transaction recorded that a whole floor in Kwai Chung was leased to a local warehouse user at the market rate.

Research View

Warehouse buildings with direct lift or ramp access to all floors have been popular in the market as they make overnight operations feasible where the bulk of materials and goods from airport or cargo terminals can be conveniently unloaded and re-packaged at the same warehouse and then distributed to various retail spots or transported across the border. Given the robust trading sector where total exports (up 5.4% YOY in Q4 2016; up 10.3% YOY in Q1 2017) and container throughput (up 12.2% YOY in Q4 2016; up 14.3% YOY in Q1 2017) remained strong. We expect that quality warehouse buildings, especially those with direct lift or ramp access to all floors, will remain popular and demand for such buildings is unlikely to ease in the near future.