1) Sun Hung Kai Properties wins residential land parcel in Tai Po for HKD6.3 billion
Sun Hung Kai Properties (SHKP) beat nine other competitors in a government tender and won a 354,132 sq ft (32,900 sq m) residential land parcel in Pak Shek Kok, Tai Po for a higher-than-expected price of HKD6.3 billion (USD807 million), representing the developer’s second successful government land tender in a month. Based on a developable gross floor area of 949,376 sq ft (88,200 sq m), the transaction price translates to HKD6,646 (USD852) per sq ft. The tender fetched a 69% higher price than the previous site in the area which sold for HKD3,932 (USD504) per sq ft to Sino Land in 2016. Under the condition of the tender, SHKP is required to build a residential care home for the elderly i.e using the new site for government accommodation with a net floor area of not less than 14,574 sq ft (1,354 sq m). (Source: SCMP, 18 February 2019)
SHKP will likely enjoy a healthy profit margin on the development, even though the transacted price exceeded the upper threshold of expectations and the developer must pay for the additional costs of developing elderly care housing. We expect that the selling prices of completed flats will be ranging from HKD16,000 (USD2,051) to HKD20,000 (USD2,564) per sq ft.
Despite the current market downturn, we think that the developer is confident about the longer-term residential prices. In addition to the expected reasonable profit margin from the unit sales, developers could also hold the apartments for leasing before selling for better prices. While rental growth remains firm with a limited new supply on the Hong Kong Island, leasing demand in other areas may increase. For example, Pak Shek Kok could evolve as another popular expatriate community given its proximity to international school campuses, country life and a low-density environment.
2) Demand for data centres to grow by 13% per year between 2019 and 2023
According to a report released by Structure Research, which focuses on cloud and data centre segments in the internet infrastructure market, NTT Communications, SUNeVision Holdings and Equinix are Hong Kong’s colocation leaders, commanding 55% of the overall revenue in the sector. Structure Research forecasted that the Hong Kong colocation market generated HKD6.9 billion (USD883 million) in 2018 and will grow by 17% to HKD8.1 billion (USD1.0 billion) in 2019, and to reach HKD13.3 billion (USD1.7 billion) by 2023, at a compound annual growth rate of 13%. (Source: SCMP, 13 February 2019)
Since the Hong Kong government began accepting applications for converting industrial buildings into data centres in 2010, there have been only 27 cases of partial or en-bloc conversions and one redevelopment. This is due to the limitations of wholesale conversions involving items such as power capacity and fire safety. However, conversion of industrial buildings remains the major source of new data centre supply due to the limited land supply. By 2020, we expect the total supply of data centres to increase to 8.0 million sq ft (743,000 sq m), increasing from 7.1 million sq ft (660,000 sq m) in 2018. With a limited new supply, the growing demand for data centre spaces should drive the average utilisation rate of data centres in Hong Kong from 80% in 2017 to above 90% in 20201, according to a report by DBS Group Research. We expect that technology will continue to play a vital role in the coming five years, and demand for data centres will be driven by the advent of cloud computing and Artificial Intelligence, as well as the growing e-commerce sector.
1 Hong Kong Data Centres, October 2016
3) New Japanese discount department store to take on weak consumer sentiment
Don Quijote (Donki), a Tokyo-based retail chain listed on the Tokyo Stock Exchange is set to launch its first Hong Kong location in July this year. The company operates in more than 160 stores worldwide, most of which are in Japan. The Japanese discount mega store will lease 15,000 sq ft (1,394 sq m) in the basement floor of Mira Place Two at 118 Nathan Road in Tsim Sha Tsui, with a reported monthly rental of about HKD1 million (USD127,000). Besides a shopping area, its Hong Kong branch will also feature a café. The market entry to Hong Kong represents the retailers third overseas’ location, following its launch in Hawaii and Singapore. Moreover, Don Quijote will soon open its first location in Bangkok, Thailand. (Source: SCMP, 13 February 2019, donki.com)
With regards to the current retail market environment, the leasing transaction is a win-win outcome for both the tenant and the landlord, as Don Quijote can leverage the adjusted market rent while the landlord can refine its tenant mix in the mall. Offering a fresh profile and new products, we believe that the retailer can generate high foot traffic. Demand for retail space from this type of occupiers does not usually focus on high-street shops in core retail districts due to high rents.
Despite the clouded consumer sentiment, we have continually witnessed new market players enter the local retail scene. By setting up the first location on Tsim Sha Tsui’s prime street, Donki is showing confidence in Hong Kong’s retail market. We do believe the new comer, which specializes in discount non-discretionary items such as cosmetics and household items, can prove successful given the recent lacklustre retail sales in the high-value segment. In our opinion, Tsim Sha Tsui’s high-streets offer a great leasing opportunity, especially for daily necessities as the location is highly frequented by both local consumers and tourists. Furthermore, Tsim Sha Tsui should benefit from the Express Rail Link which has boosted the number of tourists.