1)  Investment activities expected to heat up after US Interest Rate unchanged

News 
The US Federal Open Market Committee decided to keep interest rates unchanged in September, while indicating a rise before the end of this year, most likely in December 2016. The Fed has policy meetings scheduled in early November and mid-December. Economists believe policymakers will avoid a rate hike in November in part because the meeting falls just days before the US presidential election. (Source: SCMP, 22 September 2016).

Agency view 
Recently announced very large deals have demonstrated that investors are becoming more optimistic about future property prices, particularly following the Fed’s decision to keep interest rates unchanged. The office investment market has heated up so far in 2H 2016 with three major deals totalling over HKD7.0 billion in September:
  • Prosperity REIT’s acquisition at 410 Kwun Tong Road for HKD1.875 billion representing a unit price of HKD12,951 per sq ft. 
  • Henderson Land announced the sale of Golden Centre for HKD 4.368 billion, representing a unit rate of HKD28,000 per sq ft. 
  • AEW Capital Management has acquired Continental Place for HKD 1.1335 billion, represents an unit rate of circa HKD23,100 per sq ft.

Research view 
Any delay in US interest rate increases is good news for Hong Kong property markets, since it will prolong the period in which Hong Kong enjoys negative real interest rates. Hong Kong has enjoyed negative real interest rates since the end of the GFC in 2009; the effective real interest rate in Hong Kong is currently about –2.1%. No other major Asian market has experienced negative real rates over all this period. In addition, Hong Kong continues to benefit from the inflow of capital from mainland China. Chinese companies have been actively acquiring offices for owner occupation and long-term investment for expansion of overseas business and portfolio diversification.


2)  Upcoming Kai Tak Land Sales will shed light on Kowloon office market

News 
The public tender for Kai Tak Site IE2 commencing on 30 September 30 2016 has already drawn plenty of attention among local and mainland Chinese developers. The site covers a land area of 152,407 sq ft with a maximum GFA of 1.097 million sq ft for commercial development, which comprises two adjacent land parcels capable of being developed into an iconic twin-office-tower with a maximum building height of 120 metres. The market expects the land sales price will achieve a new record high for Kowloon East. The closing of the public tender will be on 28 November 2016. (Source: Hong Kong Economic Journal, 23 September 2016).


Research view  
With Hong Kong’s second CBD gradually taking place in Kowloon East and recently announced office market investment deals, we believe the new commercial land at Kai Tak will be eagerly sought after by major developers. Both Chinese investors and developers have become key players in Hong Kong’s real estate market. In particular, according to an article from Mingtiandi [22 September 2016] citing estimates by the investment bank CLSA, Chinese developers snatched up 45% of new land sold in Hong Kong H1 2016, up from 24% in 2015. Surging land prices in top-tier Chinese cities are narrowing the price gap between those cities and Hong Kong, while Hong Kong is more attractive in terms of market stability. We expect Chinese investors, especially Chinese developers, to participate in government public tender with aggressive bids for the remaining land sales this year.   


3)  Corporate interest in flexible workspace solutions on the rise

News 
HSBC has taken membership at WeWork’s Tower 535 on Jaffe Road (a grade A office building in Causeway Bay) and has rented more than 300 desks to house its digital and transformation teams. HSBC is now the biggest member firm for WeWork in Asia-Pacific. Other banks are also looking to co-working space to provide a flexible alternative to reduce their footprint or for short-term project space. (Source: SCMP, 23 September 2016).


Research view  
In our report of 10 June titled” Flexible Workspace – Here to Stay” we argued flexible workspace is a sustainable phenomenon which will continue to thrive. Attesting to our view, HSBC has become the largest corporate customer of WeWork in Hong Kong and indeed Asia. This news clearly demonstrates the emergence of new, diverse working habits and corporations’ need to be innovative. Demand for flexible workspace solutions persists with improving future prospects. Grade A and B office buildings, especially in Hong Kong’s fringe CBD areas, should benefit from the expansion of flexible working operators.
 

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.