Property Times Decentralised office leasing gains pace 16 il 2013 Contents Economic Overview 2 Office 3 Retail 5 Residential 6 Investment 7 Definitions 8 Authors David Ji Head of Greater China Research + 852 2507 0779 david.yx.ji@dtz.com Kelvin Wong Research Analyst +852 2250 8815 kelvin.ch.wong@dtz.com In Q1 2013, overall office net absorption increased quite substantially and reached 417,688 sq ft, thanks to two large transactions in Central. Meanwhile, overall office rent also stopped declining, and increased mildly by 1.26% quarter-on-quarter (q-o-q) to reach HK$61.5 per sq ft per month (Figure 1). The year-on-year (y-o-y) growth of total visitor arrivals remained strong at 19.3%, reaching 4,022,120 in February. Total retail sales have also shown stronger growth and reached HK$41.4 billion (US$5.3bn) in February, a 22.7% y-o-y increase. Although international retailers remain interest in setting up branches in Hong Kong, some second- and third-tier street shops remain vacant as a result of high expectation gap between landlords and retailers. After the government s further cooling measures in February, along with the increase in mortgage rate by major banks in March, many prospective buyers adopt a wait-and-see attitude. As such, number of residential transactions in March fell to 4,534, the second-lowest monthly volume in the past 13 months. However, the overall residential price decreased only mildly in March, by 1.2% compared to February. And due to greater price surge in the first two months, the overall residential index increased 2.5% q-o-q. Since the recent round of government measures were extended to cover nonresidential properties, the total number of deals exceeding HK$100 million dropped from 91 in Q4 2012 to 77 in Q1 2013, and investment volume dropped more significantly by 40.6% q-o-q to HK$19.57 billion (US$2.673bn). Transaction volume for office dropped more notably by 52.9% q-o-q to HK$7.28 billion (US$0.93bn) in Q1 2013, as the new policies have increased transaction costs significantly and scared off short-term investors. Figure 1 Contacts David Ji Head of Greater China Research + 852 2507 0779 david.yx.ji@dtz.com DTZ office rental index (2005 2017F) Q1 2006 = 100 250 200 Hans Vrensen Global Head of Research 150 100 + 44 20 3296 2159 hans.vrensen@dtz.com 50 0 2017F 2016F 2015F 2014F 2013F 2013 2012 2011 2010 2009 2008 2007 2006 2005 Central/ Admiralty Wanchai/ Causeway Bay Island East Tsimshatsui DTZ Research
Economic Overview Real GDP annual growth rate reached 2.5% y-o-y in Q4 2012, a fairly significant improvement compared to the 1.3% y-o-y growth in Q3 2012 (Table 1). Inflation rose slightly in Q1. The overall composite CPI in February increased 4.4% y-o-y, higher than the 3.7% growth rate in November 2012 (Table 1). The seasonally adjusted unemployment rate this quarter remained at 3.4% (Table 1) reflecting a relatively positive employment sentiment. Total exports dropped 16.9% y-o-y to HK$215.7 billion in February thanks to the Lunar New Year holidays (Table 1). Without the distortion, the value of total exports of goods rose by 0.3% y-o-y. Domestic private consumption expenditure growth improved compared to last quarter. In Q4 2012, it increased 4.1% y-o-y, greater than the 2.8% y-o-y growth in Q3 2012 (Table 1). Meanwhile, the total tourist arrival in February reached 4,022,120 visitors (Table 1). Table 1 Economic indicators Indicator Period Unit Value Change y-o-y (%) GDP at constant prices* Q4 2012 HK$bn 504.6 +2.5 Total exports Feb 2013 HK$bn 215.7-16.9 Private consumption expenditure Unemployment rate (seasonally adjusted) Q4 2012 HK$bn 330.6 +4.1 Dec 2012 Feb 2013 % 3.4 - Visitor arrivals Feb 2013 Million 4.0 19.3 Composite CPI Feb 2013-114.3 +4.4 Total retail sales value Feb 2013 HK$bn 41.4 +22.7 *In chained (2010) dollars Source: Census and Statistics Department, HKSAR, Hong Kong Tourism Board www.dtz.com Property Times 2
Office Amidst signs of stabilisation this quarter city-wide overall rent also reversed its declining trend to increase slightly by 1.26% q-o-q to reach HK$61.5 (US$7.9) per sq ft per month (Table 2, Figure 2). Meanwhile, overall net absorption increased substantially to reach 417,688 sq ft. In the Central Financial District (CFD) of Sheung Wan / Central / Admiralty, two major deals Bank of America Merrill Lynch s relocation from Citibank Plaza and IFC to Cheung Kong Centre and China Construction Bank s takeup in its newly-completed CCB Tower have raised the net absorption of the submarket to 307,093 sq ft. However, overall leasing activities in Central remained relatively quiet amidst cost concerns. Rents in the CFD had remained unchanged from last quarter at HK$104 (US$13.5) per sq ft per month (Table 2, Figure 2). In Wanchai / Causeway Bay and Island East, solid demand from non-financial sectors such as IT and retail, as well as from finance sector s decentralisation, had driven net absorption of the two submarkets to reach 41,221 sq ft and 49,150 sq ft, respectively. Availability ratios in the two districts also dropped significantly (Table 2). In particular, the availability ratio in Island East has dropped to a historic low of 1.65% (Table 2). In Tsimshatsui and Kowloon East, net absorption this quarter remained stable at negative 1,971 sq ft and 22,195 sq ft, respectively, while rent increased marginally by 0.27% and 1.38% q-o-q to HK$33.7 (US$4.3) and HK$31.5 (US$4.0), respectively (Table 2, Figure 2). The market of the CFD of Sheung Wan / Central / Admiralty is expected to be stable as multinational financial institutions remain cautious. Nevertheless, grade A office supply will remain tight throughout 2013 (1.45 million sq ft) and 2014 (0.889 million sq ft) which is expected to support the overall rental level (Figure 3). In Causeway Bay, the redevelopment of Sunning Plaza will reduce leasing stock and create additional demand for leasing, especially for this submarket and even for Island East, as the building s existing tenants will need approximately 220,000 sq ft office space elsewhere. Table 2 Grade A office market statistics District Sheung Wan / Central / Admiralty Wanchai / Causeway Bay Total stock (million sq ft) Availability ratio (%) Monthly Rent (HKD per sq ft) 29.31 5.97 104 - Change q-o-q (%) 16.24 4.74 48 +3.5 Island East 10.98 1.65 39 +4.8 Tsimshatsui 9.27 3.62 33 +0.3 Kowloon East 12.40 5.46 32 +1.4 Overall 78.20 4.75 62 +1.3 Figure 2 DTZ office rental index (2005 2017F) Q1 2006 = 100 250 200 150 100 50 0 Figure 3 2005 2006 2007 2008 2009 Grade A office supply, net absorption and availability ratio (2005-2014F) GFA sq ft million 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00-1.00-2.00 2010 2011 2012 2017F 2016F 2015F 2014F 2013F 2013 Central/ Admiralty Wanchai/ Causeway Bay Island East Tsimshatsui 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F New supply Net absorption Availability ratio % 10 8 6 4 2 0-2 -4 www.dtz.com Property Times 3
Map 1 Office availability by location The Government of the Hong Kong SAR Map reproduced with permission of the Director of Lands www.dtz.com Property Times 4
Retail Mainland Chinese visitors continued to contribute a significant part (78%) of the total tourist arrivals which in February had reached 4,022,120 visitors or grew 19.3% y- o-y. On the back of this, retail sales also grew significantly by 22.7% y-o-y in February to reach HK$41.4 billion (US$5.3bn) (Figure 4). Although retailers that have not set up branches in Hong Kong remain interested in doing so, especially with the stronger retail sales growth after Christmas, they are cautious however facing limited available stock and high rents. Retailers who have already set up business in Hong Kong remain interested in expanding their brands, but they tend to be more interested in smaller space in secondary locations. Due to limited supply, landlords have been asking high rents and there has been a significant expectation gap between landlords and retailers. This however has caused some street shops in second- and third-tier locations to remain vacant. As a result, retail rental is growing at a slower pace this quarter. Hong Kong Island witnessed only mild rental growth of 1.1% q-o-q and 7.1% y-o-y. Although Kowloon witnessed negative q-o-q growth of 6.5%, it increased significantly y-o-y by 12.6%. New Territories witnessed the strongest q-o-q growth of 6.5%, an increase of 11.2% y-o-y (Table 3, Figure 5). Looking further into the year, the tourist volume is expected to continue its present growth trend, which should sustain local retail sales. As a result, rental growth is expected to continue. We expect in the next 12 months that the rents for first-tier street shops to grow 10%-15% y-o-y, and that for the second and third tier street shops to grow 5-10% y-o-y. Figure 4 Total retail sales ( 2007 Feb 2013) Value (HK$bn) Yearly growth (%) 60 50 40 30 20 10 0 Source: Census and Statistics Department HKSAR Table 3 Retail market statistics Rental Index (Q1 2000 = 100) q-o-q change (%) Hong Kong Island 182.3 1.1 7.1 y-o-y change (%) Kowloon 158.9-6.5 12.6 New Territories 177.4 6.5 11.2 Source: Rating and Valuation Department HKSAR, DTZ Research Figure 5 Retail rental index (Q1 2006 Q1 2013) Q1 2000 = 100 220 200 180 2007 2008 2009 2010 2011 2012 2013 Retail Sales Value Retail Volume 35 25 15 5-5 -15-25 160 140 120 100 80 60 2006 2007 2008 2009 Source: Rating and Valuation Department HKSAR, DTZ Research 2010 2011 2012 Hong Kong Island Kowloon New Territories Q1 2013 www.dtz.com Property Times 5
Residential The government has taken further market curbing measures recently, including increasing stamp duties and a tighter stress test for borrowers. Many prospective buyers have already adopted a wait-and-see attitude. As a result, total transaction volume of sale and purchase agreements for land and buildings further fell from 9,825 in February to 7,030 in March, a 28% drop (Figure 6). The number of residential transactions in March fell to 4,534, the secondlowest monthly volume in the past 12 months. Developers were hurrying to launch residential projects prior to the implementation of the new regulation on the sales of first-hand residential properties in il. This has led to an increased first-hand residential supply. In general, developers are releasing their projects at less aggressive price levels with more added incentive to attract buyers. Property owners in the second-hand residential market have also been rationalising their asking prices. As a result, the DTZ overall residential index decreased mildly in March, by 1.2% compared to February. However, since home price had already increased by approximately 4% in the first two months, the overall residential index still increased 2.5% q-o-q (Figure 7, Table 4). Supported by end-user demand, the mass market witnessed a greater price increase of 3.8% q-o-q, whereas luxury residential index only increased mildly by 0.8% (Figure 7, Table 4). Looking ahead, transaction volume is expected to remain relatively low in the coming months as many prospective buyers have become cautious, especially in the secondhand residential market, but we expect the increased supply of first-hand residential projects to increase the transaction volume and partially offset some of the decreases. Therefore, we expect the total residential transaction to stabilise at the current level for the next few months. Figure 6 Transaction volume of S&P Agreements (Q1 2005 Q1 2013) Number of S&P Agreements 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 Source: Land Registry Figure 7 Residential price index ( 2005 Mar 2013) Table 4 5,000-2000 = 100 240 220 200 180 160 140 120 100 80 60 Primary residential market statistics Mass market Luxury market 2005 2006 2007 2008 2009 2010 2011 2012 2013 2005 2006 2007 2008 2009 2010 2011 2012 2013 Mass residential Luxury residential Overall Total stock (no. of units) Price index ( 2000=100) q-o-q change (%) y-o-y change (%) 1,013,878 213.53 3.8 22.1 81,697 226.99 0.8 6.7 Overall 1,095,575 219.11 2.5 15.0 www.dtz.com Property Times 6
Investment Since the recent round of government measures were extended to commercial properties, the total number of deals exceeding HK$100 million dropped from 91 in Q4 2012 to 77 in Q1 2013, or a 15.4% q-o-q drop. Since there were fewer large deals transacted compared to last quarter, total investment volume dropped 40.6% q-o-q to HK$19.57 billion (US$2.673bn) (Tables 5& 6). The government stamp duties and the way they are implemented have deterred short-term investors, particularly those who wish to buy en-bloc offices and sell the premises on a strata-title basis afterwards for a quick profit. As such, office transaction volume dropped by 52.9% q-o-q, from HK$15.47 billion (US$1.98bn) in Q4 2012 to HK$7.28 billion (US$0.93bn) in Q1 2013 (Tables 5, 6). Nevertheless, supported by corporate end-user demand, sales of strata-title office remained relatively robust. As a result, the number of major office deals dropped only slightly, from 28 in Q4 2012 to 20 in Q1 2013 (Tables 5&6). Retail transaction volume also dropped significantly, by 41.8% to HK$6.55 billion (US$0.84bn). Given the quarterly number of major deals dropped only marginally, from 40 to 35 (Tables 5& 6), we are seeing reduced deal sizes as well. Luxury residential remained quiet this quarter. The quarterly number of major residential deals dropped from 15 to 12, and the transaction volume decreased 38.7% q- o-q to HK$2.29 billion (US$0.29bn) (Tables 5& 6). Looking into 2013, the market is envisaging the effect of government duties to be short term given the robust economic fundamentals, low interest environment and the strong investor demand. Office and retail properties will particularly benefit when sentiment picks up. Table 5 Total number of major deals Q3 2012 Q4 2012 Q1 2013 Luxury residential 33 15 12 Office 19 28 20 Retail 34 40 35 Industrial 7 6 5 Others 11 2 5 Total 104 91 77 Table 6 Total consideration of major deals (HK$ million) Q3 2012 Q4 2012 Q1 2013 Luxury residential 6,457 3,741 2,294 Office 6,817 15,473 7,281 Retail 8,027 11,244 6,548 Industrial 1,552 1,508 1,605 Others 2,552 991 1,845 Total 25,404 32,956 19,573 Table 7 Significant Deals Property Sub-market Sector Price (HK$mn) 113 Argyle Street Mong Kok Office 2,900 Ovest, 71-77 Wing Lok Street Sheung Wan Office 640 Manley Commercial Building, 367-375 Queen s Road Central Sheung Wan Office 615 www.dtz.com Property Times 7
Definitions Availability: Availability Ratio: Development Pipeline: Net Absorption: New Supply: Prelet: Prime Rent: Rent: Prime Yield: Market Yield: Stock: Take-up: Vacancy: Total floor space in properties marketed as available to let, whether physically vacant or occupied, and ready for occupation immediately. Total space currently available as a percentage of the total stock of floorspace. Comprises two elements: 1. Floor space in course of development, defined as buildings being constructed or comprehensively refurbished to grade A standard. 2. Schemes with the potential to be built in the future, through having secured planning permission/development certification. The change in the total of occupied floor space over a specified period of time, either positive or negative. Total marketed grade A floor space which is ready for occupation now. Ready for occupation means practical completion, where either the building has been issued with an occupancy permit, where required, or where only fit-out is lacking. A development leased or sold prior to completion. The highest rent that could be achieved for a typical building/unit of the highest quality and specification in the best location to a tenant with a good (i.e. secure) covenant. (NB. This is a net rent, excluding service charge or tax, and is based on a standard lease, excluding exceptional deals for that particular market.) Gross transacted rents (unless otherwise specified), which excludes management fees and other outgoings. The best (i.e. lowest) yield which could be expected for a typical building/unit of the highest quality and specification in the best location leased to a tenant with a good (i.e. secure) covenant. (NB. This is a net yield, which uses net income, after deducting all non-recoverable expenditure, divided by the purchase cost, excluding transaction costs and taxes.) Annual transacted rent as a percentage of the capital value of the property. Total accommodation in the commercial and public sectors both occupied and vacant. Floor space acquired for occupation, including the following: (i) offices let/sold to an eventual occupier; (ii) developments pre-let/sold to an occupier; (iii) owner occupier purchase of a freehold or long leasehold. (NB. This includes subleases but excludes lease renewals.) Floor space that is empty, i.e. not occupied. It may be being marketed, or it may not (whether because a lessee is not occupying, it is being refurbished or it is deliberately being left empty by the landlord). www.dtz.com Property Times 8
Other DTZ Research Reports Other research reports can be downloaded from www.dtz.com/research. These include: Occupier Perspective Updates on occupational markets from an occupier perspective, with commentary, analysis, charts and data. Global Occupancy Costs Offices Obligations of Occupation Americas Obligations of Occupation Asia Pacific Obligations of Occupation EMEA Office Occupier Review Asia Pacific Office Occupier Review Europe The TMT Sector ober 2012 The European Insurance Sector June 2012 Property Times Regular updates on occupational markets from a landlord perspective, with commentary, charts, data and forecasts. Coverage includes Asia Pacific, Bangkok, Beijing, Berlin, Brisbane, Bristol, Brussels, Budapest, Central London, Chengdu, Chongqing, Dalian, Edinburgh, Europe, Frankfurt, Glasgow, Guangzhou, Hangzhou, Ho Chi Minh City, Hong Kong, India, Jakarta, Japan, Kuala Lumpur, Luxembourg, Madrid, Manchester, Melbourne, Milan, Nanjing, Newcastle, Paris, Poland, Prague, Qingdao, Rome, Seoul, Shanghai, Shenyang, Shenzhen, Singapore, Stockholm, Sydney, Taipei, Tianjin, Ukraine, Warsaw, Wuhan, Xian. Insight Thematic, ad hoc, topical and thought leading reports on areas and issues of specific interest and relevance to real estate markets. China Property Market Sentiment Survey uary 2013 India Special Economic Zones December 2012 Singapore Executive Condominiums December 2012 European Retail Guide: Shopping Centres December 2012 UK Secondary Market Pricing December 2012 Singapore Office Demand December 2012 China E-commerce & Logistics November 2012 Net Debt Funding Gap November 2012 German Open Ended Funds ober 2012 London Office to Residential Conversions ober 2012 Great Wall of Money ober 2012 DTZ Research Data Services For more detailed data and information, the following are available for subscription. Please contact graham.bruty@dtz.com for more information. Investment Market Update Regular updates on investment market activity, with commentary, significant deals, charts, data and forecasts. Coverage includes Asia Pacific, Australia, Belgium, Czech Republic, Europe, France, Germany, Italy, Japan, Mainland China, South East Asia, Spain, Sweden, UK. Money into Property For more than 35 years, this has been DTZ's flagship research report, analysing invested stock and capital flows into real estate markets across the world. It measures the development and structure of the global investment market. Available for Global, Asia Pacific, Europe and UK. Foresight Quarterly commentary, analysis and insight into our inhouse data forecasts, including the DTZ Fair Value Index. Available for Global, Asia Pacific, Europe and UK. In addition we publish an annual outlook report. Property Market Indicators Time series of commercial and industrial market data in Asia Pacific and Europe. Real Estate Forecasts, including the DTZ Fair Value Index TM Five-year rolling forecasts of commercial and industrial markets in Asia Pacific, Europe and the USA. Investment Transaction Database Aggregated overview of investment activity in Asia Pacific and Europe. Money into Property DTZ s flagship research product for over 35 years providing capital markets data covering capital flows, size, structure, ownership, developments and trends, and findings of annual investor and lender intention surveys. www.dtz.com Property Times 9
DTZ Research Contacts Business space Mark Price Phone: +852 2507 0706 Email: mark.jl.price@dtz.com Business space Andy Yuen Phone:+852 2507 0722 Email: andy.cy.yuen@dtz.com Investment Alvin Yip Phone:+852 2507 0716 Email: alvin.kp.yip@dtz.com Business space Kevin Lam Phone: +852 2507 0571 Email: kevin.yw.lam@dtz.com Consulting Alva To Phone:+852 2507 0550 Email: alva.yh.to@dtz.com Property Management Edward Law Phone:+852 2922 4522 Email: edward.yk.law@dtz.com Valuation & advisory services KK Chiu Phone: +852 2507 0602 Email: kk.chiu@dtz.com DISCLAIMER This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ 2013 www.dtz.com Property Times 10