HK Market to record steady growth

Market to record steady growth

Wee-Liat Lee

Friday, May 11, 2007

With strong economic fundamentals, a buoyant labor market, rising incomes and the impetus stemming from the generous offerings in the 2007-08 budget, the property market in Hong Kong as a whole recorded steady growth in the first quarter.
Demand in the Hong Kong Grade A office market continued to benefit from corporate expansions despite moderate economic growth through the latter part of 2006, and anecdotal evidence suggested that this momentum continued into the first quarter.

While banking, finance and legal services companies continued to expand in Central, the market likewise saw a steady level of expansion across the other markets.

Meanwhile, cost-sensitive tenants continued to relocate to non-core markets like Kowloon East and to non- Grade A offices within core areas.

With the exception of Hong Kong East, all office sub-markets recorded a positive net take-up in the first quarter. Overall net take-up amounted to about 342,000 square feet, slightly higher than that in the fourth quarter of 2006.

On the supply side, no new Grade A office project was completed in the first quarter after the delay of 633 King's Road's completion until the second quarter.

With the absence of new supply and the strong leasing activity in Central and the Kowloon non-core office sub- markets, overall vacancy decreased from 5.4 percent to 5 percent at the end of the first quarter.

The investment market was highlighted by the whole-block purchase of three adjoining non-Grade A office buildings in Sheung Wan by Citigroup Property Investors for about HK$1.5 billion. It is reported that the three sites will be amalgamated and redeveloped into Grade A offices.

During the first quarter, overall average net effective rental for Grade A offices rose by 2.8 percent quarter on quarter while overall average capital value increased by 2.3 percent.

In the retail property market, growing incomes stemming from rising salaries and bonus payments contributed to a higher level of domestic demand. The retail market continued to register robust growth in the first quarter, with retail sales increasing by 11.4 percent year on year during the January-February period. The various tax benefits proposed in the 2007-08 budget are set to benefit the consumption market. In the long run, the tax cut will raise the disposable income of taxpaying households by 23 percent. This will in turn induce further spending.

With the strengthening consumer confidence, the market saw stronger expansion demand for prime retail properties in major shopping districts from brand-name retailers throughout the quarter. These retailers are generally those with wider profit margins and stronger financial positions to bear rising rental costs.

The renovation of Crawford House (formerly Lane Crawford House) in Central was completed in the quarter with the opening of H&M as its anchor tenant in March.

During the quarter, rents for prime street shops grew by 3.3 percent while prime and decentralized shopping center rentals grew by 5.6 percent and 2.9 percent respectively. Leveraging on the existing momentum and additional stimulus from tax relief, we expect a more positive outlook.

Rents in prime streets and prime shopping centers could continue to achieve moderate rental growth in the next 12-month period.

In the residential market, the sales market saw a significant pick-up in transaction volume in the first quarter, driven primarily by lower mortgage rates and improved buyer affordability stemming from salary increases and year-end bonuses.

The generous offerings in the 2007-08 budget will also relieve the financial burden of property buyers, thus triggering stronger "end-user" demand.

The number of residential sale and purchase agreements rose by 31.6 percent year on year to 23,328 units during the quarter.

During the quarter, capital values for luxury properties rose by 5.1 percent.

Demand for high-end properties remained strong for the leasing market, with those on Hong Kong Island particularly sought after.

The remaining units in Hos Villa in Stanley and Luard on the Park in Wan Chai were all leased out in the quarter. Rents recorded a rise of 1.9 percent in the same period.

The pay rises underpinned by the buoyant labor market and the generous offerings in the 2007-08 budget, will help boost buyer confidence and trigger upgrading demand.

Capital values for the overall residential market will continue to grow while rental values for luxury properties will continue to rise on the back of the inflow of expatriates and tight supply.

In the industrial market, the momentum of the warehouse market remained strong during the quarter, on the back of a robust trading environment.

Total imports and exports grew by 9 percent year on year in the first two months.

The outlook for local consumption and retail sales in Hong Kong remained upbeat, leading to sustained demand for warehouses from retailer and other logistics operator.

The quarter saw a pickup in leasing activity.

The sales market continued to be energetic amidst the limited availability of large and quality warehouse space for sale in the market. Sales transactions were more for smaller and strata-titled properties (on a floor-by-floor basis).

The narrowing choice of warehouse stocks started to divert the attention of institutional investors to other industrial premises including flatted factories and industrial-office buildings.

During the quarter, no new warehouse completion was recorded. Warehouse rents and capital values rose by 0.2 percent and 0.8 percent, respectively. With such vibrant economic growth, local consumption and other business investment activities will help ensure a sustained level of domestically driven warehouse demand.

The external trade sector will continue to benefit from China's growing export activity, putting healthy pressure on Hong Kong's warehouse properties and other logistics facilities.

Wee-Liat Lee is head of research, Greater China, at Jones Lang LaSalle