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