26 April 2017
1) IMF has raised 2017 global economic outlook
The International Monetary Fund (IMF) has raised its outlook on global growth, citing a postelection surge in confidence in the United States, better prospects in large emerging markets and an uptick in global trade. The rosy forecast is something of a change of mind for the IMF, which has been fairly downbeat in recent years in terms of the global economy’s capacity to deliver sustained growth. IMF forecasts a 3.5% growth rate in 2017, compared with 3.1%in 2016 and global trade volume will expand 3.8%this year and 3.9% in 2018. However, IMF warned against protectionist tendencies in developed economies. (Source: New York Times, 18 April 2017)
The improved global economic outlook reported by the IMF is a welcoming sign for Hong Kong. In recent months, the Hong Kong Government has reported a stronger-than-expected real GDP growth rate of 3.1% in Q4 2016 and an improved trade volume for the first two months of 2017. We expect the growth of trade and better economic outlook will prompt more companies to consider further expansion, which will support office rent in both core and decentralised business districts. Although the total retail sales value was down by 3.2% in the first two months of 2017, the number of tourist arrivals has stopped falling further. The overall retail trade could see a turnaround in H2 2017 when more people benefit from an improved economy and are ready to loosen their purse strings.
2) High value-added service sector uplifted the overall business confidence for Hong Kong in Q2 2017
The Census and Statistics Department (C&SD) has just released the results of the Quarterly Business Tendency Survey for Q2 2017, which shows that overall business sentiment across all sectors has improved marginally over Q1 2017. However, we are seeing a more significant improvement in terms of business sentiment in finance & insurance and ITC sectors. Overall, the high value-added services sector, also including Real Estate and Professional Services, has consistently shown the highest level of confidence since 2016. The survey result also indicated that more companies across all sectors are prepared to increase their headcounts in Q2 compared to Q1 2017. In particular, significantly more respondents in the information and communications sector expect their hiring to increase in Q2 2017 from Q1 2017. (Source: Census & Statistics Department, 21 April 2017)
Banking and finance companies and real estate developers from China continue to drive up office rents and commercial property value under their strong appetite for business presence in Hong Kong. The strong demand is mainly concentrated around Central area where numerous PRC firms want to set up their first office in the IFC. This can create a bidding scenario where incoming tenants are paying asking or over market rents in the IFC. However, owing to the high rents, we are also seeing non-financial PRC firms look to decentralised areas to consolidate their operations. For example, one of China’s largest listed telecommunications firms is considering consolidating its offices into Quarry Bay with the objective of achieving cost reduction and increasing workplace efficiency. In general, landlords will continue to charge PRC companies higher rents but will be more cautious about entering into a lease agreement with the incoming tenants.
In the long run, we look at business confidence as a good leading indicator of future office rent movement. With greater confidence in the high value-added service sector, the overall Grade A office rent will continue to climb in 2017. We reaffirm our view that office rent on Hong Kong Island will increase by 4% in 2017 whilst rent in Kowloon will remain low thanks to a large new supply pipeline, especially for Kowloon East submarket. More MNCs and professional firms will consider relocating their operations to decentralised locations as rent in Central becomes less affordable.
3) Homebuyers flocking to second-hand market further push up housing prices
Hong Kong’s skyrocketing property prices are pushing flat-hunters in the secondary market to quicken their purchase decisions. With prices in some new projects shooting up by 20 to 40% in less than a month, more and more home-seekers are flocking to the secondary market. In many cases, buyers in the secondary market made their decision without physically seeing the apartment they want because it was still being occupied by the tenant, making an immediate visit impossible. (Source: South China Morning Post, 18 April 2017)
In the first week of April 2017, it was reported that more than 24 second-hand residential property transactions surged to a record high value within their respective developments. One of the transactions is a two-bedroom unit of Grand Waterfront located in To Kwa Wan, with transaction price of about HKD19,000 (USD2,445) per sq ft. Around 80% of new transaction prices are 1% to 16% higher than the online mortgage valuation of different banks. Therefore, these home buyers have to prepare extra cash, as much as a million dollars, for down payment. Since residential property prices are on an upward trend, the phenomenon of the slightly lower mortgage valuation than actual transaction price for second-hand residential units is expected to last for some time.
The new 15% AVD stamp duty implemented in November 2016 has not been effective in containing the residential price growth. Overall home prices have increased for 11 consecutive months in March 2017 amid strong user demand and low interest rates. Further tightening of the cooling measures has reduced the market liquidity in the secondary market. With fewer supplies, owners are not willing to sell and reinvest, and vendors have stronger bargaining power, which has fuelled home prices to increase further. We expect mass and luxury property prices to grow by 8% and 3% respectively in 2017.