Property Times TMT sector emerges as a new driver of office market 22 October 2013 Contents Economic Overview 2 Office 3 Retail 5 Residential 6 Investment 7 Definitions 8 Author Andrew Ness Head of North Asia Research + 852 2507 0779 andrew.ness@dtz.com Contacts Fergus Hicks Global Head of Forecasting Phone: +44 (0)20 3296 2307 Email: fergus.hicks@dtz.com Hans Vrensen Global Head of Research + 44 20 3296 2159 hans.vrensen@dtz.com In Q3, leasing demand for office softened, and overall net absorption within the quarter reached -191,928 sq ft, attributed mainly from Sheung Wan/ Central/ Admiralty. As a result, overall rent decreased slightly by 0.72% quarter-on-quarter (q-o-q) to reach HK$60.8 per sq ft per month. However, few stronger sectors such as technology, media and telecommunications (TMT) sector were witnessed as continuing to expand within this quarter, a phenomenon which benefited districts such as Wanchai/ Causeway Bay and Kowloon East. As a result of increasing number of daytripping Mainland visitors from across the border, New Territories retail rent witnessed the highest year-on-year (y-oy) rental growth within this quarter, growing by 5.5 %, as compared to much flatter performance of retail rents in Hong Kong Island and Kowloon. While competition of tier 1 high street shops in prime retail districts remained intense, vacant space is on the rise in tier 2 and 3 street shops in prime retail districts, due the gap which has opened in rental expectations between landlords and tenants in these areas. Residential price remained stable and overall prices this quarter only decreased marginally by 0.1% q-o-q, although transaction volume continued to remain low. Supported by end-user demand, mass residential price registered an increase of 0.5% q-o-q, whereas luxury residential price decreased 0.8% within the same time frame. Total number of deals exceeding HK$100mn dropped further by 36% within Q3, declining from 42 in Q2 2013 to 27 in Q3 2013, and investment volume dropped even more by 43% to just HK$7.524bn (US$0.969bn) in Q3 2013. Only transaction in industrial, hotel, and development site did not witness a decline, as industrial properties are attractive due to their revitalization potential and the hotel sector has benefited by strong tourism growth in recent years. Figure 1 DTZ office rental index (2005 2018F) Q1 2006 = 100 250 200 150 100 50 0 2018F 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 3.3% in Q2 2013, higher than the 2.9% annual growth in Q1 2013 (Table 1), reflecting some improvement in local economic activities this quarter. The value of total exports dropped slightly by 1.3% y-o-y to reach HK$307.5bn in August 2013 (Table 1). The decrease in total exports was particularly severe in exports to Asian destinations including Malaysia (-16.7% y-o-y), Japan (-5.2% y-o-y), and Mainland China (-3.6% y-o-y). Inflation increased slightly in Q3. The overall composite CPI in August increased 4.5% y-o-y, lower than the 3.9% growth rate in (Table 1). The seasonally adjusted unemployment rate remained low at 3.3% in June August 2013, reflecting that employers optimism in general towards employment (Table 1). Domestic private consumption expenditure increased 4.5% y-o-y in Q2, decelerating from the 7.0% y-o-y growth in Q1 (Table 1). Mainland tourist growth continued to support total visitor arrival growth. In August 2013, total visitor arrival grew 9.4% y-o-y to reach 5,358,087. On the other hand, retail sales also grew by 8.1% y-o-y in 2013 to reach HK$38.715bn (US$4.989bn) (Table 1). Table 1 Economic indicators Indicator Period Unit Value Change y-o-y (%) GDP at constant prices* Q2 2013 HK$bn 482.6 +3.3 Total exports Aug 2013 HK$bn 307.5-1.3 Private Consumption Expenditure Unemployment rate (seasonally adjusted) Q2 2013 HK$bn 329.2 +4.2 Jun 2013 Aug 2013 % 3.3 - Visitor arrivals Aug 2013 Million 5.4 9.4 Composite CPI Aug 2013-113.2 +4.5 Total retail sales value *In chained (2011) dollars Aug 2013 HK$bn 38.7 +8.1 Source: Census and Statistics Department, HKSAR, Hong Kong Tourism Board www.dtz.com Property Times 2
Office This quarter, the overall market witnessed deceleration as a consequence of the softening of demand. Overall net absorption this quarter reached -191,928 sq ft, and overall rent decreased slightly by 0.72% q-o-q to reach HK$60.8 per sq ft per month (Table 2 and Figure 2). In the Central Financial District (CFD) of Sheung Wan/ Central/ Admiralty, where corporate in the finance sector are still in the midst of downsizing or consolidating their business, negative net absorption of 201,490 sq ft was recorded, contributing the majority of overall negative net absorption this quarter. On the other hand, rental in the CFD declined marginally by 1.2% to HK$103.0 (US$13.2) per sq ft per month (Table 2 and Figure 2). Leasing activities were quiet in Island East and Tsimshatsui, which recorded negative net absorption of 48,905 sq ft and 30,550 sq ft respectively. Rentals in the two districts remained unchanged compared to last quarter, at HK$37.4 (US$4.8) and HK$33.3 (US$4.3) per sq ft per month respectively (Table 2 and Figure 2). However, there were a few stronger sectors such as technology, media and telecommunications (TMT) sector, which continued to witness expansion. This trend in particular benefited districts such as Wanchai / Causeway Bay, and to a lesser extent Kowloon East as well. For instance, SAP leased one floor (19,500 sq ft) in Times Square; Linkedin took a floor (16,500 sq ft) in Hysan Place. As such, net absorption in Wanchai/ Causeway Bay reached 52,207 sq ft, the highest among all sub-markets this quarter. The availability ratio in the market also dropped from 3.94% in Q2 to 3.62% this quarter (Table 2). In Kowloon East, supported by take-up from non-finance sectors, net absorption reached 36,810 sq ft, the second highest after Wanchai/ Causeway Bay. However, due to a new project, the Kin Seng Commercial Centre providing an additional of 120,000 sq ft office space to the market being completed within the quarter, the availability ratio increased from 5.93% in Q2 to 6.29% in Q3 (Table 2). Looking forward, the market is expected to remain cautious as we expect the current downsizing trend to continue. However, the TMT sector is expected to continue to be a significant source of office demand due to the strong growth in e-commerce, social media, computer applications and sales of hi-tech products. 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) Change q-o-q (%) 29.31 6.25 103-1.2 16.02 3.62 47 - Island East 10.98 2.47 37 - Tsimshatsui 9.27 4.32 33 - Kowloon East 12.52 6.29 33 - Overall 78.32 4.95 61-0.8 Figure 2 DTZ office rental index (2005 2018F) 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 (2005-2015F) 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 2013 2018F 2017F 2016F 2015F 2014F 2013F Central/ Admiralty Wanchai/ Causeway Bay Island East Tsimshatsui 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 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 Number of total visitor arrivals in August grew 9.4% y-o-y to reach 5,358,087, of which 79% were Mainland Chinese visitors. At the same time, retail sales also grew strongly, jumping by 8.1% y-o-y to reach HK$38.72bn (US$4.99bn) (Figure 4). Figure 4 Total retail sales ( 2007 Aug 2013) Value (HK$bn) Yearly growth (%) 60 35 50 25 40 15 30 5 With respect to visitors spending pattern, while jewellery, watches and clocks, and valuable gifts still account for the largest portion of sales, sales of department store products increased more significantly by 23.2% y-o-y in August, reflecting a changing consumption pattern from high-end luxury products to more mid range products. 20 10 0 2007 2008 2009 2010 2011 2012 2013 Retail Sales Value Retail Sales Volume -5-15 -25 Such change in spending pattern is to a certain extent contributed by the increased proportion of daytrip visitors, who are generally more interested in shopping for midrange cosmetics products rather than the luxury products. The emergence of this trend is benefiting the regional shopping malls in New Territories close to the border or along the major light railway lines, such as Sheung Shui, Tuen Mun, and Shatin. As such, New Territories retail rental index witnessed the highest y-o-y growth in Q3, rising by 5.5%, followed by Kowloon, at 4.1%. On the other hand, Hong Kong Island rental dropped 3.6% q-o-q and 4.8% y-o-y (Table 3 and Figure 5). In the traditional prime retail districts such as Tsimshatsui and Causeway Bay and Mongkok, competition for retail space in tier 1 high street shops remained intense. In particular, cosmetics and mid-market retailers remained keen on expansion. For instance, a cosmetics company had moved to Canton Road in Tsimshatsui with a 286% increase in rentals. However, vacant space increased in tier 2 and 3 street shops within the prime retail districts as there are persisting expectation gaps between landlords and tenants with respect to leasing such space. Looking ahead, Cosmetics and medium level retailers are expected to see improved sales in the next quarter, which will be underpinned by the holidays the October golden week and Christmas that bookend the quarter. This trend is expected to continue to support retail rental prospects. Source: Census and Statistics Department HKSAR Table 3 Retail market statistics Rental Index (Q1 2000 = 100) q-o-q change (%) y-o-y change (%) Hong Kong Island 189.6-3.6-4.8 Kowloon 158.2 1.2 4.1 New Territories 187.4-6.7 5.5 Source: Rating and Valuation Department HKSAR, DTZ Research Figure 5 Retail rental index (Q1 2006 Q1 2013) Q1 2000 = 100 220 200 180 160 140 120 100 80 60 2006 2007 2008 2009 2010 2011 2012 Hong Kong Island Kowloon New Territories 2013 Source: Rating and Valuation Department HKSAR, DTZ Research www.dtz.com Property Times 5
Residential Under the influence of the government curbs and concerns on the earlier than expected implementation of QE tapering by the US, prospective buyers remained cautious. However, mortgage rates in Hong Kong remained low as competition among banks continues to be intense. Property owners therefore were not willing to offer generous discount as they have strong holding power in general under the current low interest rate environment. As a result of expectation gaps between property owners and prospective buyers, the transaction volume of secondary residential properties remained low throughout the quarter. Since tember, as some more new projects have been launched to the market, there was some pick up in primary residential sales. Nevertheless, total transaction volume of buildings and land in Q3 only reached 16,258, which is only 57% of the volume recorded in Q3 2012, although it did increase by 9.6% compared to previous quarter (Figure 6). Residential price remained stable despite the low transaction volume, due to the strong holding power of secondary home owners. As such, the overall residential price index decreased marginally only by 0.1% q-o-q, and it increased 3.2% y-o-y. But compared to its peak in February of this year, the price is down by 3% (Figure 7 and Table 4). Mass residential properties demonstrated relatively stronger momentum with respect to both transaction volume and pricing as their sales are more supported by end-user demand. As such, the mass residential price index increased 0.5% q-o-q, and 6.6% y-o-y. However, since luxury residential market is more affected by the hike in sales tax, its price index dropped by more than 0.8% q-o-q, and 0.9% y-o-y (Figure 7 and Table 4). As at 30 th tember, there are 22 residential projects totalling 9,328 units pending pre-sale consent approval, according to Lands Department. It is expected that a fairly large proportion of these projects will be launched to the market by the end of this year, which should provide more choices for prospective buyers. Moreover, developers have also begun to offer more incentives to buyers since tember. As such, we expect a larger proportion of prospective buyers will switch their interest from secondary market to primary market due to the larger incentive and wider variety of choices, and as such residential property prices should continue to face downward pressure. Figure 6 Transaction volume of S&P Agreements (Q1 2005 Q3 2013) Number of S&P Agreements 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Source: Land Registry Figure 7 Residential price index ( 2005 2013) Table 4-2000 = 100 240 220 200 180 160 140 120 100 80 60 Primary residential market statistics TBU 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 (%) 1,032,377 211.24 0.5 6.6 y-o-y change (%) 85,555 220.54-0.8-0.9 Overall 1,117,932 215.10-0.1 3.2, Rating and Valuation Department HKSAR www.dtz.com Property Times 6
Investment Large lump-sum property investment dropped further this quarter, as the total number of deals exceeding HK$100mn dropped 36% q-o-q from 42 in Q2 2013 to 27 in Q3 2013, whereas investment volume dropped even more by 43% to just HK$7.524bn (US$0.969bn) in Q3 2013 (Tables 5 and 6). All sectors witnessed decline with the exception of industrial, development sites and hotel. Both number of transactions and total consideration offered for properties in the luxury residential, office, and retail sectors dropped to less than half of those in last quarter (Tables 5 and 6). Only long-term investors and end-users remained interested in the market as the significant increase in transaction costs had deterred short term investors. Investors remained interested in industrial buildings thanks to the government s encouragement of the revitalization of such properties by converting them to commercial use. Therefore, number of industrial transaction increased from 4 to Q2 to 6 in Q3, although total consideration dropped slightly by 28% q-o-q to HK$1.44bn (US$0.186bn) in Q3 (Tables 5 and 6). Thanks to the strong growth of tourism in Hong Kong, long term investors remained interest in investing in acquiring both hotels and hotel site. As a result, investment in Other section increased significantly (Tables 5 and 6). For instance, Nan Fung bought a hotel development site in Sai Ying Pun for HK$908mn (US$117mn); and the en-bloc sale of a hotel in Wanchai was transacted for HK$680mn (US$88mn) (Tables 7). Table 5 Total number of major deals Q1 2013 Q2 2013 Q3 2013 Luxury residential 14 14 5 Office 28 8 4 Retail 40 11 4 Industrial 11 4 6 Others 11 5 8 Total 104 42 27 Table 6 Total consideration of major deals (HK$ million) Q1 2013 Q2 2013 Q3 2013 Luxury residential 2,720 2,380 815 Office 15,916 5,182 846 Retail 7,437 2,553 819 Industrial 3,089 1,991 1,440 Others 2,918 1,003 3,605 Total 32,255 13,109 7,524 Table 7. Significant Deals Property Sub-market Sector Price (HK$mn) 43-45 Des Voeux Road West Sai Ying Pun Site 908 20 Caine Road Mid-Level Site 732 Butterfly on Morrison, 35-39 Morrison Hill Road Wanchai Hotel 680 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.) Floors pace 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 Global Occupancy Costs Logistics Obligations of Occupation Americas Obligations of Occupation Asia Pacific Obligations of Occupation EMEA Global Office Review India Office Demand and Trends Survey 2012-13 Poland Banking Sector - uary 2013 Motorways of the Sea - uary 2013 The TMT Sector - October 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. 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. Insight Thematic, ad hoc, topical and thought leading reports on areas and issues of specific interest and relevance to real estate markets. Great Wall of Money - October 2013 Quantitative Easing - UK Regions - tember 2013 Singapore Government Land Sales - tember 2013 UK lending market -tember 2013 Quantitative Easing - August 2013 Property Investment Guide Asia Pacific 2013-2014 Singapore Insight Residential July 2013 Net Debt Funding Gap - June 2013 China Insight - The Healthcare Sector - April 2013 City of London occupier demand - April 2013 European Sustainability Guide - April 2013 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. 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. 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. 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 Global Head of Forecasting Fergus Hicks Phone: +44 (0)20 3296 2307 Email: fergus.hicks@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 Chief Executive, North Asia Edward Cheung Phone: +86 21 2208 0088 Email: edward.kc.cheung@dtz.com Business space Andy Yuen Phone:+852 2507 0722 Email: andy.cy.yuen@dtz.com Investment Kenneth Yip Phone:+852 2507 0715 Email: kenneth.kk.yip@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