27 July 2017
1) Rising residential rent to push up Hong Kong’s future CPI Index
On 21 July 2017, Nomura, a global investment house, increased its estimate of Hong Kong’s CPI index for 2018 from -0.1% to 1.8% to reflect the effect of rising residential rents on CPI. Although the Hong Kong government has introduced several rounds of housing market cooling measures since November 2016, housing prices have continued to rise to new record highs in recent months. Hong Kong’s CPI is closely correlated with residential rent which has increased 9.7% during the first five months of this year. However, it takes 11 months for the CPI index to fully reflect the recent rental growth. (Source: Reuters, 21 July 2017)
The residential leasing market has been very active on Hong Kong Island, both on the South side and in the Mid-levels/Peak. The room for negotiation has narrowed mostly due to a lack of stock. All the main landlords already have a clear view of the units becoming available until the end of the summer. Good quality apartments can rent out very quickly. However, in the higher budget range (above HKD 140,000 – 150,000 per month), there seem to be fewer transactions and things are moving slowly.
The active leasing market in the traditional luxury districts has supported a 0.7% QOQ increase of luxury residential rent in Q2. Against the backdrop of increasing supply and interest rates, some owners believe that home prices are approaching their peak level and have put their properties up for sale instead of leasing, selling for the increased value of their properties. This has put further pressure on the total available leasing stock. With limited stock on the Island, the demand for the luxury apartments in Kowloon and the New Territories should be strengthened in H2 supported by the opening of new schools and improved infrastructures.
2) More co-working space competition as industry-specific operators are expanding
The local co-working space operator Campfire which launched last year is planning to have eight more sites in Hong Kong by year end, building on strong startup and freelance culture prospects. Campfire is currently offering single industry-focused co-working space at two sites; a tech-focused space in an industrial building in Kennedy Town, and since the beginning of this year a fashion-focused site called Campfire Creative in Remex Centre, Wong Chuk Hang. In its fashion-focused centre, it offers additional fashion-specific facilities such as a sewing room, a photography studio and a catwalk. By creating industry-specific communities the company aims to maximise member collaboration and subsequently success. The operations shall capture the genius loci (i.e. spirit of a place) and make better use of underutilised space. (Source: SCMP, 23 July 2017)
Competition between co-working office space providers is growing amid ongoing expansion. Differentiation is a major tool to stand out from the increasing number of operators. Although location, service and price levels are some of the main differentiators, innovative ideas such as pooling entrepreneurs of the same industry by providing highly specialised industry-specific equipment are expected to find approval by the startup community. Another operator, The Hive, is offering both co-working spaces for mixed communities and specially equipped sites including the Hive Studios for social media and photography and MakerHive for the design industry. This community-based environment creates a working atmosphere that facilitates intra-sector synergy effects. We believe such business models will gain traction, with more tailor-made solutions coming to the market that are incorporating more industry relevant features.
3) Investors seeking en bloc building acquisitions for value-added opportunities
Hong Kong Economic Times reported that there were at least ten en bloc building transactions over the month, involving about HKD12 billion (USD1.5 billion). Wan Chai and Causeway Bay were popular with several notable transactions recorded, including two commercial buildings at Sugar Street, Causeway Bay sold to a property group for HKD1.68 billion (USD0.2 billion), Cubus, a commercial building in Causeway Bay, being sold to a local investor for approx. HKD2 billion (USD0.3 billion) and the HKD965 million (USD124 million) acquisition of the commercial building at 487-489 Lockhart Road in Wan Chai. On the Kowloon side, a foreign private investment firm has purchased 50% stake in an office building at 133 Wai Yip Street in Kwun Tong for HKD1 billion (USD0.1 billion). (Source: HKET, 14, 18 and 19 July 2017)
Property funds have been actively seeking en bloc building acquisitions, with industrial and office buildings and sites being the most popular market in H1 2017. The total number of transactions of en bloc industrial and office buildings increased from nine in H1 2016 to 23 in H1 2017. The activity in the Wan Chai and Causeway Bay areas has driven the districts’ office prices up by 8.5% QOQ in Q2 2017. Amid low interest rates and a positive market outlook, we think that the strong investment market will maintain its momentum, and that investors will continue to look for buildings which provide value-added opportunities through repositioning, rezoning or redevelopment.