1) China’s crackdown on ‘irrational’ outbound investment to put a brake on trophy building acquisition

News

China formally laid down new rules on overseas investments, making explicit its de facto campaign against "irrational” acquisitions of assets. The authorities set out three categories - banned, restricted and encouraged. Property, hotel, film, entertainment and sports investments will now be subject to further restrictions. The new rules encourage companies to support the nation’s ambitious Belt and Road Initiative backed by President Xi Jinping. China’s outbound investment slumped 44.3% in the first seven months from a year earlier as policy makers imposed brakes on companies’ foreign acquisitions. (Source: Bloomberg, August 18, 2017)

Research View

Since China imposed restrictions on outbound investment in late 2016, the total PRC investment in Hong Kong’s property market has decreased 74% YOY to HKD4.5 billion (USD0.6 billion) in the first seven months in 2017. Nevertheless, the commercial property investment market has remained active. Many en-bloc office buildings with a price range between HKD10-30 billion had been sold to local investors or foreign fund managers. However, landlords of large ticket en-bloc buildings seeking Chinese investors will have to be more open to negotiation if they would like to offload their properties in H2 2017.

2) Carrie Lam considers resuming revitalisation scheme for industrial buildings

News

The Chief Executive said on last Tuesday that the government had been studying to resume a scheme to allow single ownership industrial buildings to change their use without having to pay a hefty premium. The government will also consider relaxing the restriction on usage of lower floors of industrial buildings, provided their design and facilities could meet fire safety standards. Development Secretary Michael Wong said the government will also consider refining the application threshold of 80% ownership of an entire building for the compulsory sale in order to help the majority of owners to redevelop their industrial properties. (Source: SCMP, 15 August 2017; The Standard, 17 August 2017)

Research View

According to a study by the Planning Department completed in 2014, around 75% of Hong Kong’s industrial buildings are over 35 years old and around 75% of the industrial space in Kowloon East accommodates non-industrial activities. Decreasing industrial activities, underutilisation, and ageing of industrial buildings have forced owners to convert their properties for optimisation of use. Lowering the threshold of ownership for redevelopment will provide new value-added opportunities for the industrial property market which will stimulate transformation of old industrial areas to new commercial hubs, especially for the CBD2 development in Kowloon East.

3) New World’s latest win in Cheung Sha Wan boosts Kowloon West as future business hub

News

New World Development has beaten eight other competitors to win its third business site – for either office or retail use – in Cheung Sha Wan, raising its investment in the area to nearly HKD15 billion (USD1.92 billion) in the past six months. The price represents HKD7,995 per sq ft, which is at the higher end of market forecasts which ranged from HKD2.6 billion to HKD3 billion, or HKD7,000 to HKD8,000 per sq ft. In May, New World Development beat seven rival developers with a HKD4.03 billion (USD52 million) bid to win its second plot in Cheung Sha Wan, after it secured the first one for HKD7.79 billion (USD1 billion) in February. (Source: SCMP, 17 August, 2017)

Valuation View

The competitive land sale and the active property market reflect the confidence in the Cheung Sha Wan market, which is part of the emerging Kowloon West business hub. The selling price of new office units, for example in 650 Cheung Sha Wan Road, reaches HKD12,000 per sq ft and the sales of new-style industrial buildings have also become very active, reaching more than HKD10,000 per sq ft.

Research View

With a total GFA of 1.5 million sq ft provided by Grade A and B office buildings, Cheung Sha Wan is a much smaller office market than Kwun Tong or Kowloon Bay. Due to good MTR accessibility and close proximity to the container port, Cheung Sha Wan has been popular among SMEs focusing on logistics, manufacturing and sourcing activities. A lack of large floor plate supply has limited Cheung Sha Wan’s attractiveness to MNCs looking for relocation options. New office supply with larger floor plates, for example around 12,000 - 15,000 sq ft, can increase Cheung Sha Wan’s appeal as a relocation destination for larger corporates.

4) Latest statistics show that the F&B sector sentiment remains positive

News

The local restaurant group Tsui Wah has extended the lease of its flagship branch of 8,160 sq ft at 15-19 Wellington Street in Central, which has been in operation since 1998. After renegotiating lease terms with the landlord, the restaurant group has renewed its lease for three years at a discount of 43%, reducing the monthly rental from HKD2.3 million (USD294,000) to HKD1.3 million (USD166,000). The new rent of HKD159 (USD20.3) per sq ft adds up to HKD36 million (USD4.6 million) savings in operational costs over the next three years. With an asking rent of HKD1.88 million (USD240,000), the new lease is 18% below market value. (Source: Mingpao, 18 August 2017)

Research View

Hong Kong’s F&B sector sentiment remains positive as new brands are entering the market and existing operators are extending their branch network likewise. The trend can be seen across different cuisine styles as well as from fast food to fine dining. Black Sheep Restaurants, one of Hong Kong’s largest restaurant groups, will open its 15th restaurant, New Panjab Club, in Central in August and J.CO Donuts & Coffee, an Indonesian based lifestyle café concept with more than 300 outlets across Asia, has further expanded to Tseung Kwan O after entering the market end of last year. Government data shows that the total restaurant receipt value has grown by 4.1% YOY in H1 2017. Positive YOY growth has been recorded across all types of restaurants, with non-Chinese restaurants and fast food restaurants showing the highest growth with 5.7% and 5.4% YOY, respectively. (Source: CSD, J.CO Donuts & Coffee, Lifestyle Asia)