Property Times Transactions dropped sharply after measures 15 July 2013 Contents Economic Overview 2 Office 3 Retail 5 Residential 6 Investment 7 Definitions 8 Authors Kelvin Wong Research Analyst +852 2250 8815 kelvin.ch.wong@dtz.com Contacts Andrew Ness Head of North Asia Research + 852 2507 0779 andrew.ness@dtz.com Hans Vrensen Global Head of Research + 44 20 3296 2159 hans.vrensen@dtz.com Overall office net absorption reached 114,296 sq ft this quarter, supported by the take-up of smaller sized units in Sheung Wan/ Central/ Admiralty amid the pick-up in financial sector activity, as well as the relocation demand from existing tenants in the soon to be demolished Sunning Plaza, which pushed up Wanchai/ Causeway Bay net absorption. Retail sales continued to grow strongly by 12.8% year-on-year (y-o-y) to reach HK$40.6bn (US$5.2bn) in. Although the top-end luxury retail sales growth has slowed down somewhat, sales volume of jewellery, watches and clocks, and valuable gifts still registered strong growth of 35.6% y-o-y in. As a result, leasing demand from retailers, especially mid-range fashion and jewellery retailers remained strong. Residential prices have declined slightly since February under the influence of the imposition of government curbs, but have stabilised since June. Directly reflecting this trend, DTZ overall residential index decreased 2.4% quarter-onquarter (q-o-q). Total transaction volume of buildings and land decreased from 25,338 in Q1 to just 14,837 in Q2, as a result of lacklustre market performance. Total number of deals exceeding HK$100mn dropped significantly by 75.5% q- o-q from 104 in Q1 2013 to 26 in Q2 2013, and investment volume dropped 75.6% q-o-q from HK$32.255bn (US$4.135bn) in Q1 2013 to just HK$7.850bn (US$1.006bn) in Q2 2013. Commercial property investment transactions suffered the most due to the doubling of sales tax, but luxury residential transactions remained relatively stable as purchasing activity was more dominated by end-user demand. Figure 1 DTZ office rental index (2005 2017F) Q1 2006 = 100 250 200 150 100 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 2.8% y-o-y in Q1 2013, the same as that in Q4 2012 (Table 1). Growth was supported by increased domestic consumption demand and growth in financial sector activities, with net output in the finance and insurance sector increasing by 4.5% in real terms in Q1 2013, following the 1.1% real rise in Q4 2012. However, the growth was offset by a drag in net trade as imports grew faster than exports. The value of total exports dropped slightly by 1% y-o-y to reach HK$291.5bn in 2013 (Table 1), and growth in exports to mainland China slowed down significantly in to 0.7% y-o-y, compared to 15.7% y-o-y growth in April. Inflation released slightly in Q2. The overall composite CPI in increased 3.9% y-o-y, lower than the 4.4% growth rate in February (Table 1). The seasonally adjusted unemployment rate decreased from 3.5% in February April 2013 to 3.4% in March 2013, reflecting that the overall employment environment remained positive (Table 1). Domestic private consumption expenditure growth continued to be driven by strong employment figures and rising asset prices. In Q1 2013, it increased 7.0% y-o-y, accelerating from the 4.1% y-o-y growth in Q4 2012 (Table 1). Table 1 Economic indicators Indicator Period Unit Value Change y-o-y (%) GDP at constant prices* Q1 2013 HK$bn 526.3 +2.8 Total exports 2013 HK$bn 291.5-1.0 Private Consumption Expenditure Unemployment rate (seasonally adjusted) Q1 2013 HK$bn 330.3 +7.0 Mar 2013 2013 % 3.4 - Visitor arrivals 2013 Million 4.1 13.8 Composite CPI 2013-115.0 +3.9 Total retail sales value *In chained (2011) dollars 2013 HK$bn 40.6 +12.8 Source: Census and Statistics Department, HKSAR, Hong Kong Tourism Board Mainland tourist growth continued to be the main support of total visitor arrival growth. In 2013, total visitor arrival grew 13.8% y-o-y to reach 4,142,301. On the other hand, retail sales also grew significantly by 12.8% y-o-y in 2013 to reach HK$40.599bn (Table 1). www.dtz.com Report Series 2
Office This quarter, rent and take-up continued to be stable. Overall net absorption reached 114,296 sq ft, and overall rent stabilised since last quarter and increased mildly by 0.31% q-o-q to reach HK$61.7 per sq ft per month in the second quarter (Table 2 and Figure 2). Thanks to the rise in the level of global financial sector activity, in the Central Financial District (CFD) of Sheung Wan/ Central/ Admiralty, there was a marked rise in takeup in smaller sized units by financial institutions this quarter. As a result, the CFD s net absorption reached 119,962 sq ft, turning positive for two consecutive quarters, after a prolonged period of negative net absorption which persisted commencing in Q4 2011. However, rental in the CFD declined marginally by 0.2% q- o-q to HK$104.2 (US$13.4) per sq ft per month (Table 2 and Figure 2). In Wanchai/ Causeway Bay, relocation demand from existing tenants in the soon to be demolished Sunning Plaza continued to boost market demand. To cite just one example, Yahoo will relocate to Caroline Centre (32,000 sq ft). Leasing was also active in Hysan Place and 28 Hennessy Road this quarter: McCann-Erikson leased 22,000 sq ft in Hysan Place; Apple and National Australia Bank also leased one floor (16,000 sq ft) in Hysan Place, respectively. As such, net absorption in the market reached 129,392 sq ft, the highest among all submarkets this quarter; and availability ratio dropped to 3.94% (Table 2). In Island East, where there is not much available space for leasing, leasing activities were quiet. As a result, net absorption in the market was low this quarter at negative 41,519 sq ft. Hence the availability ratio also increased slightly to 2.02%, but it still remained the lowest among all submarkets. On the Kowloon side, leasing activities were less active this quarter. Tsimshatsui witnessed a negative net absorption of 34,499 sq ft and availability ratio hence increased to 3.99%. In Kowloon East, the availability ratio increased to 5.93%, as there was more available space for lease in the newly completed Elite Centre this quarter. However, rent increased quite notably by 4.4% q-o-q to reach HK$32.9 (US$4.2) (Table 2 and Figure 2). Look forward, rent is expected to go up amid to improved market condition in finance sector and limited new office supply in 2H 2013 (1.01million sq ft) and 2014 (0.89million sq ft), most of which has been sold or pre-committed. 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 5.56 104-0.2 16.02 3.95 48 - Island East 10.98 2.02 39 - Tsimshatsui 9.27 3.99 33 - Kowloon East 12.40 5.93 33 +4.4 Overall 78.20 4.75 62 +0.3 Figure 2 DTZ office rental index (2005 2017F) Q1 2006 = 100 250 200 150 100 50 0 Figure 3 2005 2006 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 2007 2008 2009 2010 2011 2012 2013 2017F 2016F 2015F 2014F 2013F 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 Report Series 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 Report Series 4
Retail The growth of total visitor arrivals remained strong in Q2 at 13.8% y-o-y, reaching 4,142,301 in. Mainland Chinese visitors continued to contribute to a significant portion (74%) of total tourist arrivals in. Retail sales also grew strongly by 12.8% y-o-y to reach HK$40.6bn (US$5.2bn) (Figure 4). Although there are some slow down in top-end luxury retail sales growth, the mid-to-high-end item sales growth remained strong. In fact, the y-o-y growth in volume of sales of jewellery, watches and clocks, and valuable gifts is the highest among all types of retail products tracked, at 35.6%, followed by sales of commodities in department stores at 24.5%. Leasing demand from retailers, especially mid-range fashion and jewellery retailers, remained strong. For example, Chow Tai Fook, a local jewellery brand, leased a G/F shop of 1,686 sq ft at Island Beverley Centre in Causeway Bay for HK$1.9 million per month. Sincere, a local department store, leased a portion of the G/F and the whole of 1-2/F of 108-120 Percival Street in Causeway Bay for HK$2 million per month. Although Hong Kong Island witnessed a mild rental decline of 3.9% q-o-q y-o-y rental growth y-o-y has still been quite significant, at 7.3%, the highest among the three markets. Looking ahead, visitor volume is expected to continue to follow its present rising trajectory and this should help to sustain local retail sales. As a result, rental growth is expected to continue the present trend. Figure 4 Total retail sales ( 2007 Feb 2013) Value (HK$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 193.9-3.9 7.3 Kowloon 155.2 1.4 2.2 New Territories 180.5 8.2 4.7 Source: Rating and Valuation Department HKSAR, DTZ Research Figure 5 2007 2008 2009 2010 2011 2012 2013 Retail Sales Value Retail Sales Volume 5 y-o-y change (%) 35 25 15-5 -15-25 Retail rental index (Q1 2006 Q1 2013) Q1 2000 = 100 220 200 180 160 140 120 100 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 Report Series 5
Residential Under the influence of the government curbs and the increase in mortgage rates by some major banks in March, residential market performance was lacklustre in general. At the same time, the situation was further exacerbated by the temporary decrease of first-hand residential supply after the implementation of Residential Properties (Firsthand Sales) Ordinance on 29 th April, as developers hesitancy to offer new properties for sale in light of the new ordinance caused transaction volume of S&P agreements to drop. As a result, total transaction volume of S&P agreements for buildings and land a statistic which contains strata title property sales as well, decreased from 25,338 in Q1 to just 14,837 in Q2 (Figure 6). Residential prices have come down from their peak in February as a result of low activity levels in the market, and the overall price decreased 3.8% from February to. Since then residential prices showed signs of stabilizing in June, and consequently the DTZ overall residential index only decreased 2.4% q-o-q (from March to June), while increasing 8.3% y-o-y due to a greater price surge in 2H 2012 (Figure 7 and Table 4). Within the second quarter, the mass residential market displayed stronger momentum in both transaction volume and pricing, partly due to the influx of white form applicants to buy second-hand Home Ownership Scheme (HOS) flats, and the relatively smaller impact from extra sales tax on lower priced homes. As a result, the mass residential index decreased less compared to the overall market, by 2.3% q-o-q, and increased 13.3% y-o-y, significantly greater than the overall market (Figure 7 and Table 4). Luxury residential market saw a similar q-o-q price drop of 2.5%, and only increased 2.3% y-o-y (Figure 7 and Table 4). In fact, number of residential properties under HK$3 million accounted for 33% of total residential transactions in June, a fairly significant increase compared to 26% in March, reflecting a greater transaction volume at low-priced homes this quarter. Looking ahead, a healthy set of fundamentals in the local economy should continue to provide support to the demand for homes and the prices. However, being an open market, Hong Kong is sensitive to external factors, most notably the trend of interest rates as the US Federal Reserve has recently outlined plans to cut stimulus. Moreover, the tight liquidity environment in mainland China is also a great concern on Hong Kong property market, as it will not only affect the trend of interest rate, but also more importantly, the real economic performance in Hong Kong. In the next few months, we expect transaction volume to remain at currently low level as a result of government curbs and concerns on rising interest rate, and we expect price to drop further in the second half of the year by approximately 5%. Figure 6 Transaction volume of S&P agreements for buildings and land (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 (%) 1,032,377 208.58-2.3 13.3 85,555 221.41-2.5 2.3 Overall 1,117,932 213.90-2.4 8.3, Rating and Valuation Department HKSAR www.dtz.com Report Series 6
Investment The property investment suffered a major hit this quarter, as the total number of deals exceeding HK$100mn dropped 75.5% q-o-q from 104 in Q1 2013 to 26 in Q2 2013, whereas investment volume dropped 75.6% q-o-q from HK$32.255bn (US$4.135bn) in Q1 2013 to just HK$7.850bn (US$1.006bn) in Q2 2013 (Tables 5 and 6). Commercial property investment transactions suffered the most in this quarter due to the doubling of sales tax. Transaction volume for office properties dropped notably by 83.8% q-o-q, from HK$15.916bn (US$2.041bn) in Q1 2013 to HK$2.573bn (US$0.330bn) in Q2 2013, and number of major office deals dropped 82.1% q-o-q from 28 in Q1 2013 to 5 in Q2 2013 (Tables 5 and 6). Retail transaction volume dropped even more significantly by 88.9% q-o-q to HK$0.826bn (US$0.106bn) in Q2, and number of major retail deals dropped 90% q-o-q from 40 in Q1 2013 to just 4 in Q2 2013 (Tables 5 and 6). Investors interest in purchasing retail properties to divide into smaller retail premise for rent or re-sale has been completely muted after the imposition government s cooling measure in February. Supported by two en-bloc industrial transactions (Table 7), although number of major industrial deals also dropped largely by 72.6% q-o-q to just 3 in Q2 2013, transaction volume dropped only 43% q-o-q to HK$1.761bn (US$0.226bn) in Q2 (Tables 5 and 6). However, luxury residential sales remained relatively stable this quarter since this market segment has become increasingly dominated by end-user demand. Still, the number of major residential deals dropped 21.4% q-o-q to 11 in Q2 2013, and transaction volume decreased 26.9% q- o-q to HK$1.989bn (HK$0.26bn) (Tables 5 and 6). Table 5 Total number of major deals Q4 2012 Q1 2013 Q2 2013 Luxury residential 15 14 11 Office 28 28 5 Retail 40 40 4 Industrial 6 11 3 Others 2 11 3 Total 91 104 26 Table 6 Total consideration of major deals (HK$ million) Q4 2012 Q1 2013 Q2 2013 Luxury residential 3,741 2,720 1,989 Office 15,473 15,916 2,573 Retail 11,244 7,437 826 Industrial 1,508 3,089 1,761 Others 991 2,918 701 Total 32,956 32,255 7,850 Table 7 Significant Deals Property Sub-market Sector Price (HK$mn) Wing Hang Financial Centre, 60 Gloucester Road Wanchai Office 1,588 73-75 Hung To Road Kwun Tong Industrial 980 Wai Tak Industrial Building, 27-29 Tonkin Street Cheung Sha Wan Industrial 650 www.dtz.com Report Series 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 Report Series 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 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. 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, North America 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, UK and China. In addition we publish an annual outlook report. Insight Thematic, ad hoc, topical and thought leading reports on areas and issues of specific interest and relevance to real estate markets. Insight Net Debt Funding Gap - June 2013 China Insight - The Healthcare Sector April 2013 Insight City of London occupier demand April 2013 European Sustainability Guide April 2013 Great Wall of Money March 2013 European Retail Guide - Shopping Centres March 2013 China Property Market Sentiment Survey - uary 2013 India Special Economic Zones - December 2012 Singapore Executive Condominiums - December 2012 UK Secondary market pricing - December 2012 Singapore office demand - December 2012 China Ecommerce & Logistics - November 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. 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 Report Series 9
DTZ Research DTZ Research Contacts Global Head of Research Hans Vrensen Phone: +44 (0)20 3296 2159 Email: hans.vrensen@dtz.com Global Head of Forecasting Fergus Hicks Phone: +44 (0)20 3296 2307 Email: fergus.hicks@dtz.com Head of Strategy Research Nigel Almond Phone: +44 (0)20 3296 2328 Email: nigel.almond@dtz.com Head of Americas Research John Wickes Phone: +1 312 424 8087 Email: john.wickes@dtz.com Head of CEMEA Research Magali Marton Phone: +33 1 49 64 49 54 Email: magali.marton@dtz.com Head of North Asia Research Andrew Ness Phone: +852 2507 0779 Email: andrew.ness@dtz.com Head of South East Asia and Australia New Zealand Research Dominic Brown Phone: +61 (0)2 8243 9999 Email: dominic.brown@dtz.com DTZ Business Contacts 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 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 July 2013 www.dtz.com Property Times 10