1) Link REIT sells 17 Hong Kong malls to Gaw-Goldman venture for HKD23 billion

News

Link REIT, the largest real estate investment trust in Asia, on Tuesday announced the sale of a portfolio of properties that includes 17 shopping centres in Hong Kong for HKD23 billion (USD2.94 billion) – the biggest sale of its kind in the city. Link REIT will sell commercial property totalling 2.2 million sq ft (206,00 sq metres) to a consortium led by Hong Kong-based private equity fund Gaw Capital Partners. US-based investment bank Goldman Sachs is part of the consortium. The shopping centres are located in Kowloon and the New Territories close to MTR stations and include more than 8,000 car parking spaces. (Source: SCMP, 28 November 2017; Link REIT, 28 November 2017)

Research View 

Apart from being the largest retail investment transaction in Hong Kong, the transacted price was reported to be 52% higher than the valuation of the portfolio on 30 September 2017, indicating the strong interest from the buyers. As neighbourhood malls are targeting local demand, property values have been strongly supported by the steady increase in local private consumption expenditure since Q2 2009. While developers can further upgrade the malls by refurbishing and repositioning, we think integrating new retail concepts together with technology will offer greater value-added opportunities for retail properties. Colliers' Hong Kong Investor Survey results suggest that investors’ interest in retail properties has increased as they believe that the retail market has bottomed and will recover moderately in 2018.

2) Lower retail rent offers a good opportunity to expand

News

Sa Sa International Holdings Ltd, a skincare and cosmetics retailer, announced in its interim results a 14.5% YOY rise in net profit to HKD109.9 million (USD14.1 million) for the first-half of FY17/18 as consumer sentiment and mainland tourist arrivals improved. In Hong Kong, the group seized the opportunity of weakening rents by opening new stores at premium locations in traditional tourist districts to replace stores which were previously relocated to secondary streets following high rents. Sa Sa aims to further capitalise on the current rental weakness by establishing more strategic locations as well as shops in residential areas and transport hubs, including near the Mainland border. (Source: Retailnews.asia, 24 November 2017; hkexnews.hk, 23 November 2017)

Research View

We expect the total retail sales to a record growth of 1-2% YOY for this year, and of a moderately higher 3-4% for next year. Strong local market sentiment and recovering inbound are fuelling a steady pick-up in the retail market. Hong Kong’s unemployment rate stands at 3.0%, the lowest since January 1998 and the overall number of tourists increased by 2.2% YOY for the first three quarters of this year. In addition, we expect high street rents to see moderate 1-3% growth in 2018 which will offer good opportunities for active sectors and new players, such as premium watches & accessories, sports & lifestyle apparel, and F&B and desserts, to take up strategic locations in popular shopping districts.


3) Hong Kong domestic households are living in smaller units

News

The Census and Statistics Department has published a publication entitled "2016 Population By-census Summary Results". It released the figures for median floor area of accommodation of domestic households for the first time, at 430 sq ft (40 sq m), whereas that of domestic households living in private permanent housing was 506 sq ft (47 sq m). The median per capita floor area of accommodation of domestic households was 161 sq ft (15 sq m). The average size of household has reduced from 3.1 persons to 2.9 persons. The housing ownership ratio dropped by 4.3% while the rent increase by 81.8% in the last decade. (Source: HKET, 28 November 2017; 2016 Population By-census Main Results)

Research View

The domination of smaller units in the primary market reflects the growing trend towards smaller household sizes in Hong Kong. We expect new completion to reach an annual average of 18,500 units from 2017 to 2019, and think that 77% of new units will be smaller than 430 sq ft (40 sq m), compared to only 66% of the total new supply in the past decade. More people have entered the leasing market, and we expect the rent value will rise by 5-8% in 2018 due to an improved economic growth and positive income growth.