1)  Office tenants opt to renew amid expensive rents and increasing relocation costs


Agency view 
Whilst the limited supply on Hong Kong Island has slowed leasing transactions from large multinational corporations, we continue to see a steady stream of tenants within the 3000sf – 5000 sq ft size range remain active, particularly in Central. A commonly reoccurring trend is that, without doubt, the majority of these tenants are choosing to renew in situ as opposed to relocating. The impetus behind this shared sentiment is the increasing relocation costs of fitting a new office. Once this cost is accounted for, the savings derived from potentially moving into a more cost effect building quickly diminishes, thus making a renewal more financial viable. Looking forward, as Hong Kong Island is experiencing extremely tight vacancy levels, we expect to see the trend continue for the remaining part of 2016 and spill over into 2017.

Research view 
According to latest Radar Report by Colliers: “How to thrive in a high-rent world”, we project that the benchmark Hong Kong Grade A office rent to increase 12% between now and 2020, supported by the growth of high-value service sector.  However, rental gap between core and non-core areas will widen further by the end of 2020 as we foresee the rent difference between Central and Admiralty and Kowloon East will increase from HKD77 (USD9.9) per sq ft per month (based on NFA) at the end of 2015 to HKD104 (USD13.7) per sq ft per month (based on NFA) by 2020.  We advise corporate occupiers should take a holistic approach to their real estate strategy, factoring in demographic changes, new technology adaptation, and the utilisation of flexible working space in order to achieve better business performance and long term cost savings.


2)  Hong Kong office market to be dominated by Chinese buyers

News  
Mainland corporates account for about 21% (or 5.2 million sq ft) of all office space leased in the Central Grade A office market, up from 10% in 2009. If the trend continues, it is estimated that up to 28% of that tenant base will be mainland corporates by 2021. (Source: SCMP, 23 August 2016)

Agency view  

Separately, ICBC (Asia) were said to be under negotiation for the majority portion of the Centre owned by Cheung Kong, paying a record-breaking price of HKD34.8 (USD4.46) billion. If the deal eventuates, this would mark the largest whole block office sales transaction in Hong Kong. 

Research view 

More Chinese state-owned companies should be headed to Hong Kong with a full support from the central government under the “Going Out” policy in China. As a regional financial and legal hub, Hong Kong plays a pivotal role in providing the professional services needed by mainland corporates seeking to step into global markets. The stock connect cross-border trading schemes between Hong Kong, Shanghai and Shenzhen are seen as catalysts for China’s companies to enter Hong Kong.


3)  Low office yields in HK are driving the trend of more local investors pursuing real estate overseas

News  
Hong Kong recorded the lowest office investment yield in a survey of 54 markets worldwide, a trend that has prompted local investors to look abroad for property investment opportunities. The city offered Grade A office yields of 2.71% as of June 2016, making office properties less attractive investments when compare with the world’s gateway cities, such as Sydney (5.62%), Los Angeles West (4.77%), San Francisco (4.64%) and New York (4.15%). Meanwhile, London’s West End ranked the second lowest with a market yield of 2.8%. Ho Chi Minh City and Hanoi offered the highest yields at 9.3% and 9%, respectively. (Source: SCMP, 24 August 2016)

Research view  

Low office yields in Hong Kong are driving the trend of more local investors pursuing real estate overseas, this would make sense for those looking for yields to sell and buy elsewhere. Real estate investment abroad can seem like a perfect opportunity but investing abroad is much more complicated, considering loans to individuals are difficult to secure.

4)  Movements from industrial buildings to offices

Agency view  
Further to the recent serious fire at a self-storage building in Kowloon Bay, the Hong Kong government has started inspecting the users in industrial buildings, especially those in Kwai Chung, Kwun Tong and San Po Kong. Semi-retail operators that have been taking advantage of low rents in these industrial buildings are receiving notice letters from the government in previous weeks. Whilst, we are expecting this trend to continue, there will be an opportunity for these users to take advantage of the vast availabilities of revitalised offices in the aforementioned districts. Some new revitalised office buildings have vacancy rates as high as 62%.

5)  Retailers are taking advantage of falling rents

Agency view  
A Belgium Chocolate company, Godiva, opened a store at D’Aguilar Street with almost 40% rent reduction compare with the previous lease in 2014. It is Godiva’s first standalone shop in Hong Kong as they normally have stores in shopping malls.

Research view  
Some international brands seize the opportunity of falling rents to lease iconic stores in prime locations with the purpose of increasing brand awareness. During H1 2016, retail rents in the traditional top four shopping locations decreased by another 6% after a 24% decline in 2015. We expect retail rents will hit bottom in 2017.


ansion 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.