1)  The United Kingdom votes to leave the European Union


News
At The United Kingdom voted in a referendum held on 23 June 2016 to leave the European Union. "Leave" won the vote with 52% on a turnout of 72%. While the result is not legally binding, it will be difficult for the UK Parliament to ignore. (Sources: various)

Research view 
In our view, the UK’s unexpected vote to leave the EU has three chief implications for Asia Pacific property markets. Firstly, Brexit will probably lead to further downward pressure on already very low global bond yields, increasing the relative attraction of the 3-6% yields on core APAC investment property. Secondly, the vote should remind investors of the potential for shocks in developed as well as emerging countries, and hence mitigate political and economic concerns about the APAC region. Thirdly, the vote may mean that real interest rates stay low for longer than we have assumed up to now, to the near-term benefit of Hong Kong and other regional markets. These implications support the cautiously positive stance on core investment property that we advanced in our recent APAC Capital Markets report.

For further details, please see the Colliers Research reports “Brexit highlights value of core Asian property” (24 June 2016) and “APAC Capital Markets: Brightest Light in the South” (16 June 2016).
 

2)  SHKP offers 120% mortgages to speed up sales


News
Sun Hung Kai Properties is offering mortgages worth as much as 120% of a home’s value at one of its residential projects – Park Yoho Venezia in Yuen Long. The 120% mortgage plan will be offered to buyers who already own a flat that is worth at least 70% of the value of the new flat. Such incentives have risen in popularity as property prices have dropped more than 13% since peaking in September 2015 and sales have dried up. Henderson Land, Kowloon Development and Cheung Kong started offering financing of up to 90% of values last year as prices started to decline. The Hong Kong Monetary Authority has expressed concerns over aggressive financing schemes, which will indirectly increase banks’ potential credit risks. Developers have been able to circumvent government cooling measures which restrict traditional bank mortgages on properties costing less than HKD10.0 million (about USD1.3 million) to 60% of their value. (Source: Bloomberg, 20 June 2016)

Research view
Developers’ aggressive financing schemes of this sort will probably mean that more buyers run the risk of falling into negative equity. Home prices have decreased 13% from their September 2015 peak, and the prospects for a further downward price correction remain, considering the prospective interest rate hikes in the US later in the year. We predict home prices will fall 5% in the second half of 2016, bringing the decline over the year to 10%.

3)  Rumours on potential sizable surrendering of space in Grade A office market

Agency view (Kowloon Office services)
As most companies in Kowloon are re-evaluating their real estate strategies in Asia, it is rumoured that many of the sourcing-related companies are re-considering their office footprints in Hong Kong. Our Kowloon team has been hearing of an increasing volume of mergers and acquisitions; this trend is, in effect, providing opportunities for these big occupiers to re-shuffle/re-allocate their human capital across the Asia Pacific. In particular, we are hearing that some additional office space supply may be entering the market in the decentralised districts in buildings such as the Millennium City portfolio, Landmark East, Skyline Tower, and a few more around Kwun Tong and Kowloon Bay. Generally speaking, the tenancy replacement opportunities are not only happening in relatively expensive areas like Central Kowloon, but decentralised areas as well. This implies that there will be opportunities for occupiers who are looking for fitted options in the market and provide additional cost savings for them.


4)  More overseas food and beverage operators move to Hong Kong to take advantage of falling rents

News
The retail market is not completely dying, but rather undergoing a structural transformation from one that is highly driven by luxury consumption goods to one that is more reliant on mid-market brands and products. Besides mid-market brands in fast fashion, cosmetics and banking services, food and beverage operators have become more active. About 37 food and beverage brands were established in Hong Kong last year and about 10 new brands have set up in the city so far this year. During the retail boom in 2012 and 2013, F & B outlets only accounted for 10% of space in shopping malls, but this has increased to 20% and in some cases even 30%. (Source: SCMP, 21 June 2016)

Research View
A change in landscape of prime shopping areas is ultimately better for the retail sector because it results in a healthier tenant mix, not just stores selling luxury items. However, Colliers Research believes there is not enough demand from new retail sector tenants to compensate for vacated space. More supply is offering alternatives to tenants thereby putting further downward pressure on prime street rents. We reaffirm our forecast that rents of prime high-street shops will fall by 10% in 2016, following a 24% decline in 2015. We expect retail rents will hit bottom in 2018.

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.


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.