1)  Better economic prospects from the latest Quarterly Business Survey by C&SD

News 
The Census and Statistics Department (C&SD) released the results of the Quarterly Business Tendency Survey for the fourth quarter (Q4) of 2016.  The survey gathers views on short-term business performance from the senior management of about 550 prominent establishments in various sectors in Hong Kong with a view to providing a quick reference, with minimum time lag, for predicting the short-term future economic performance of the local economy. The survey covers ten major sectors in Hong Kong, namely manufacturing; construction; import/export trade and wholesale; retail; accommodation and food services (mainly covering services rendered by hotels and restaurants); transportation, storage and courier services; information and communications; financing and insurance; real estate; and professional and business services sectors  When compared with the results of the Q3 2016 survey round, the proportion of respondents expecting a worse business situation in Q4 2016 as compared with the preceding quarter has decreased to 10%, against the corresponding proportion of 17% in Q3 2016.  (Source: Census & Statistics Department, HKSAR, 21 October, 2016)

Research view 
While the results of the survey should be interpreted with care as the views collected in the survey are affected by the events in the community occurring around the time of enumeration, it does provide useful indications for the current momentum for economic growth in Hong Kong. Colliers Research also believes the survey results from selected subsectors, namely financing and insurance, real estate, professional and business services sectors, and information and communications, are closely correlated with the performance of Grade A office rent in Hong Kong. A more positive view from these subsectors should support the office rent going forward. We expect the Grade A Office benchmark rent to increase 12% between 2016-2020.

2)  Android Pay, another mobile payment system, adding new payment options for millennial shoppers

News 
Google has launched its mobile payments system Android Pay in Hong Kong, allowing Android users to make contactless payments in-store as it pits itself against Apple Pay and Tencent’s WeChat Wallet in the city. Smartphone users whose handsets are enabled with near-field communication (NFC) technology and run KitKat 4.4 or higher will be able to download the Android Pay app and pay for purchases at over 5,000 locations in Hong Kong. Users with Mastercard or Visa credit cards from six banks in the city – namely HSBC, Hang Seng Bank, Standard Chartered, Dah Sing Bank, DBS and the Bank of East Asia – will be able to link their cards to Android Pay, and make payments at a variety of shops including convenience stores such as 7-Eleven and Circle K, as well as fast food restaurants such as McDonald’s and Pacific Coffee. (Source: SCMP, 20 October 2016)

Research view  
The Hong Kong retail landscape is rapidly changing with new technology and e-commerce platforms taking a more prominent role. Mobile payment systems are particularly important for retailers to attract the millennial shoppers who are more technologically aware and value convenience. Retailers which are moving to digital platforms and adapting an omni-channel retailing strategy should utilise mobile payment systems to offer special discounts to attract more customers.

3)  Increasing rent becomes a landlord problem with tenants’ “affordability” in mind

Agency view  
Given a further 4.2% increase in Central & Admiralty rents so far this year, following on from a 15.8% increase in 2015, landlords are becoming acutely aware of affordability issues. From being aggressive on upward rental reversions throughout last year, landlords (particularly in Central) are holding rents level or providing marginal discounts to OMRV (Open Market Rental Value) in order to retain good covenants and long-term occupiers. Additional incentives such as “free swing space” provided on licence, allowing larger occupiers to restack or consolidate their existing footprints, are all part of an initiative to retain firms which are struggling with the high cost of Grade A Central offices.

Research view  
The property investment market has been hot since the delay of interest rate hike by US Federal Reserve after Brexit.  In Q3, the number of transactions over HKD 100 million has exceeded the total number for Q1 and Q2 2016 with the total investment amount exceeding HKD 31 billion.  Residential and strata-title office transaction have been particularly active in Q3.  With the capital outflow from China continues and RMB depreciation expectation, we expect the property investment market to remain active for the rest of 2016.

4)  Airport Authority to create a new destination with new hotel and mall complex on Airport Island

News  
A luxury hotel, retail and office complex adjacent to the Hong Kong International Airport will start inviting tenders from next month for a partnership with “like-minded” developers. Skycity Development, which will occupy 25 hectares at North Lantau Island – approximately two-thirds the size of Causeway Bay – hopes to cater for an influx of visitors brought on by the completion of the Hong Kong-Zhuhai-Macao Bridge and the planned third-runway system. Earlier the authority was granted a 50-year lease by the government at an unknown “nominal premium hotel with up to 750 rooms is expected to be completed by 2020. A unique retail, dining and entertainment (RDE) destination of 195,000 sq. metres, (2.10 million sq. feet) three times of the size of Harbour City in Tsim Sha Tsiu, will then be completed by 2021, which will become the single largest retail space in Hong Kong. (Source: SCMP, 18 October 2016)

Valuation view  
Being an internationally renowned metropolis city, it is exciting that Hong Kong can confirm it will have a huge integrated non-traditional shopping destination soon. The mega Skycity Development should benefit from the upcoming completion of the Hong Kong-Zhuhai-Macao Bridge and the planned third-runway system, which provide large and stable customer base. It is also great news for local Hong Kong people who lack comprehensive and massive shopping experiences. 

In addition, this plan should almost certainly help to further the growth of Tung Chung Satellite City which has fallen behind the original development target by the Government. The massive project should create a wide variety of jobs. If good job opportunities are made available locally, Tung Chung residents will not need to travel a long distance to the city. They can live, work and play in Tung Chung. It is believed that the population in Tung Chung will grow rapidly in the next five to ten years and the property price and rental for both residential and commercial should reflect this. 

We think that now is the time to consider the property market performance in Tung Chung and the growing potential in the next five years. It should not be difficult to achieve 20% growth in residential prices in Tung Chung in the next five years.

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.