1)  With high rental reversions, tenants on Hong Kong Island are mulling over cost saving options

Agency View 

With high rental reversions on Hong Kong Island, we continue to see long-term occupiers considering relocation to cheaper districts in order to reduce costs. Tenants considering this relocation strategy must also be aware of rising construction costs – high capex in terms of fitout and reinstatement costs are pushing tenants further afield in order to maximise savings and ensure the move is financially viable. 

Island East remains a popular cost-saving option for Island tenants, though extremely low vacancy in the area presents a challenge for more sizeable tenants seeking space. Further afield, we continue to see Kowloon East and Wong Chuk Hang become increasingly attractive cost-saving districts. As we move into 2017 Kowloon East will see significant new supply coming online, and we expect that this will cause a rental decline in the area. Additionally, the opening of Wong Chuk Hang’s MTR station next month will make the district a more viable option for cost-conscious tenants who wish to remain on the Island.

Research View

Hong Kong Island Grade A office rent has increased by 2.2% YTD. With a steady demand at core area and the availability of only pocket space, we believe occupiers should adopt a holistic approach for their real estate requirements and formulate a forward looking workplace strategy, which includes restacking or splitting offices, wholesale relocation, utilisation of serviced offices, and purchasing their own office space.


2)  Hong Kong developers more aggressive in buying land in face of competition from mainland rivals

News 

Hong Kong developers have changed their strategies and are getting more aggressive in government land sales in the face of tough competition from cashed-up mainland rivals that continue on their acquisition binge as the value of the yuan tumbles. During the current fiscal year, Hong Kong developers outbid mainland rivals to secure 19 out of 21 government sites available in the seven months to November, compared with 13 out of 20 plots for the whole of the previous financial year. (Source: SCMP, 27 Nov 2016)

Valuation view  

Wheelock Properties successfully won the government land tender for the residential site at Sin Fat Road in Kwun Tong since it last gained the residential site in Kai Tak in 2014. This is the first land sale after the introduction of the new stamp duty on property transactions at 15% for non-first time buyers which became effective on 5 November 2016. The Kwun Tong land sale translates into an accommodation value of HKD7,729 per sq ft, which is slightly higher than the market expectation. The land sale shows that developers have a positive outlook towards the residential market in the urban areas. In August another residential site in Yau Tong was sold to Minmetals Land at an accommodation value of HKD7,068 per sq ft. 


3)  Hong Kong Disneyland to boost business with a new HKD10.9 billion expansion

News 

Hong Kong Disneyland is seeking to boost business with a HKD10.9 billion expansion featuring, in a global first, zones based on themes from its blockbuster Frozen and Marvel superhero films. The facelift will involve a major renovation of the park’s iconic Sleeping Beauty Castle, which is expected to shut down next year and reopen in 2019. The city’s tourism industry welcomed the upgrade, expecting a boost for Hong Kong and current tourism woes should not get in the way of adding new elements to existing attractions. The expansion would be a unique global attraction which would bring new sources of tourists into the city and increase the number of overnight stayers. (Source: SCMP, 23 Nov 2016)

Agency view  

The gloomy retail environment with lower mainland tourist numbers has been cited for the closure of flagship stores in core shopping areas. According to the SCMP on 20 Nov 2016, the fashion retailer Abercrombie & Fitch is shutting down its only flagship store in Hong Kong, a 25,600-sq ft store on Pedder Street. The move would trigger a “lease termination charge” of approximately USD16 million in the next quarter.

Research view  

As mainland tourist arrival numbers continue to slide, the local retail landscape has been shifting towards local consumers. The percentage of local consumption in total retail sales has increased to 67% in 1H 2016 from a record low of 58% in 2014. Shopping malls have been revamping their tenant mix to cater for local customers’ preferences with creative F&B, new skincare and cosmetics, sports and lifestyle, modern living and retail-tainment concepts gaining popularity.


4)  The first public tender for industrial building redevelopment project was withdrawn by URA 

News

The Hong Kong Urban Renewal Authority has decided to withdraw a tender following poor demand. It had only received one tender for the industrial building redevelopment site at Elm Street, Tai Kok Tsui although more than 10 developers had expressed their interest. The 5,010-sq ft site has an existing 10-storey industrial building with a net floor area of 37,901 sq ft, The new planned use is residential. For non-residential development, the maximum GFA would be 45,000 sq ft. The worse than expected result was mainly due to high land premium, complicated process and high investment cost. (Source: Wen Hui Pao, 26 Nov 2016)

Agency view  

After the imposition of the new 15% Ad Valorem Stamp Duty (AVD) policy, we see there is influx of capital to the industrial market. In the past three weeks, more than half of the transactions were concluded at prices below HKD10 million. On the other hand, the leasing market seems losing direction because tenant renewal remains small and slow at the year end.

Research view  

Since the end of the industrial building revitalisation scheme earlier in 2016, investors have been staying away from the industrial market due to lack of redevelopment potential. Prices for industrial buildings have fallen by about 7% so far this year. With a higher yield and a smaller amount of investment required, we expect more buyers will re-enter the industrial market.