research & forecast report hong kong real estate colliers .../media/files/marketresearch/apac/... · colliers international | HonG KonG hong kong real estate market research & forecast

c o ll i e r s i n t e r n at i o n a l | H o n G Ko n G

www.colliers.com/hongkong

hong kong real estatemarket

research & forecast report

market indicators (12 month forecast)

3Q 2012 | market overview

office

luxury residential

industrial

retail

“Qe3” – cure or curse for hong kong’s real estate market? the long-awaited third round of quantitative easing, which has been dubbed “Qe3”, was finally announced in early-september 2012. as such, with increased liquidity in the marketplace and the expectation of growing inflationary pressure, the prices of commodities, including real estate, are expected to be pushed up. this situation is particularly evident in hong kong, where the local currency is pegged to the Us dollar. simply speaking, due to the flow of liquidity, asset prices in hong kong are more volatile than in other asian markets. this activity has clearly been reflected by the recent increase of stock market prices. For example, after the announcement of Qe3, the hang seng Index shot up 10% in just slightly more than a month.

In the real estate sector, despite the tightening supply of credit, in terms a further lowered loan-to-value (ltV) ratio, as per the announcement of hong kong monetary authority (hkma), the residential prices of individual housing estates reached new highs in 3Q 2012. In fact, our view on the residential market was revised in 3Q 2012. Instead of projecting a price decline over the next 12 months, our latest forecast predicts a growth of 5%. after the strong rally in the mass sector, it is quite possible that luxury residential prices could catch up.

Industrial rents and capital values remained quite firm, trending upwards in 3Q 2012. Besides the challenges presented by the global slowdown and the uncertainties in the euro zone, a positive growth scenario has been forecast for the next 12 months. meanwhile, after having a shorter-than-expected consolidation period of nine months, office rents also showed signs of stabilisation in 3Q 2012. again, due largely to the solid demand from a range of medium-sized financial companies and the support of mainland enterprises, our prediction has been revised from a decline of 4% to an increase of 4%. In the retail sector, the momentum of retail sales growth tapered off significantly to less than 5% in 3Q 2012, and the sales of luxury goods entered into negative-growth territory on a year-on-year (YoY) basis for the first time since mid-2009. as the spending per capita by mainland visitors has contracted, the growth of retail rents is slowing. however, due to sustained demand from overseas retailers, luxury retail rents in traditional shopping districts could continue to see double-digit growth over the next 12 months.

overall, due to the expectation of asset-price inflation and the belief that excess liquidity would continue to chase the limited real estate assets, the immediate response of the prices of local real estate to Qe3 was clearly positive. however, the market might have to pay a price for the positive aspects of Qe3 with the growing risk of additional price volatility, particularly when the current real estate cycle turns its course sometime in the future.

p. 2 | colliers international

hong kong | 3q 2012 | market overview

economic Update

Source: Census & Statistics Department, HKSAR Government; The EIU (2012-2015)

oVerVieW the unresolved european debt crisis and slowing economic growth in China has eroded local economic growth prospects. the overall market sentiment in the local real estate sector weakened but remained positive in 3Q 2012. the local stock market showed signs of rebounding by 7% Quarter-on-Quarter (QoQ) and back to the psychologically important 20,000 point level. the main boost for buying sentiment was the announcement of Quantitative easing three (Qe3) in the Us. end-user demand has been suppressed, however by tightening policy measures since 2010, including the special stamp Duty (ssD) and the lowering of the ltV ratio, which has effectively curbed the secondary sales market. nevertheless, residential prices grew by 2.0% QoQ as of august 2012, following the 5.2% QoQ increase in may 2012. In the midst of global economic uncertainty and the hong kong government’s decision to maintain austerity measures, sales activity in the local residential market slowed in 3Q 2012, with the number of sales and purchase agreements for residential units falling 29.5% QoQ to 19,682 during the three-month period ending august 2012.

GdpDue to improved export demand, hong kong’s economic growth recovered slightly in 2Q 2012 to 1.2% YoY, compared to 0.7% YoY in 1Q 2012. meanwhile, private consumption expenditure, which is a major contributor to economic growth, moderated from 6.5% YoY in 1Q 2012 to 3.7% YoY in 2Q 2012.

looking ahead, the uncertain economic situation in the eurozone and slowing economic growth in China will restrain overall economic growth in hong kong. however, the introduction of Qe3 will boost the world’s economy in nominal terms. as indicated by the economic Intelligence Unit (eIU), the hong kong gDP is forecast to grow by 2.6% in 2012, and local economic growth is anticipated to further increase to 4.9% in 2013.

further policy tiGhteninG by the hkmathe prime-based mortgage interest rate has remained stable since the last quarter. Further, in order to offset the possible inflow of hot money from Qe3, the hong kong monetary authority (hkma) announced further tightening policies. the maximum debt servicing ratio will be lowered from 50% to 40% for investment purposes purchases, and the maximum loan-to-value (ltV) ratio will be lowered from 40% to 30% based on the net worth of a mortgage applicant.

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hong kong | 3q 2012 | office

colliers international | p. 3

employment trends

Source: Census & Statistics Department, HKSAR Government; Colliers

Last Rally

FIRE Job Vacancy Grade A O�ce Rent

% c

hang

e ye

ar-o

n-ye

ar

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Mar

-95

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GRADE A OFFICE RENT vs JOB VACANCY IN “FIRE” SECTOR

Note: FIRE = Financing, Insurance and Real Estate

Grade a office sector


honG konG pmi hiGhest in fiVe months With marginal overall growth momentum, the hong kong Purchasing managers’ Index signalled further expansion in hong kong’s private business sector activities. the hsBC hong kong PmI edged up 0.2 points to 50.5 in august 2012 from 50.3 in July. the increase was supported by the rise in output and continuous wage growth, and that underpinned domestic demand.

hirinG expectations Weakened to the contrary, hiring expectations weakened in 3Q 2012, as 37.7% of the 432 executives surveyed in the hudson report planned to increase hiring, down 3.3 percentage points from 41% in 2Q 2012. In addition, 7.6% of the respondents expected to reduce headcounts in 3Q 2012, up from 6% in the previous quarter.

across five key business sectors, the It & t sector still showed the highest hiring expectations, with 49.6% of the respondents saying that they will increase headcounts. meanwhile, executives in the Banking & Financial services sector remained cautious in recruiting staff, as 36.7% of them plan to recruit additional staff in 3Q 2012. meanwhile, the proportion of Banking & Financial services executives forecasting reduction in headcounts rose slightly from 10% in 2Q 2012 to 10.5% in 3Q.

Job Vacancies in the “fire” sector declinedaccording to the latest figures released by the Census and statistics Department, the employment market of the Finance, Insurance and real estate (“FIre”) sector weakened in 2Q 2012. the number of job vacancies in the FIre sector contracted 9.3% YoY in 2Q 2012, after seeing a positive 10.7% YoY growth in 1Q 2012.



Source: Colliers

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tenant DemandWeak net take-upleasing demand was soft in the city’s grade a office market. In view of the uncertain economic outlook, individual large tenants downsized their premises but still preferred to stay in the same district. the slowdown in leasing activity has been reflected in the market, with the overall net take-up falling 80% QoQ to 111,000 sq ft in 3Q 2012, mainly due to the drop in net-take up in Central / admiralty.

submarkets performance Due to weaker demand for grade a office premises amidst global financial turbulence during the quarter, net take-up slowed in all submarkets. moreover, the limited stock available for lease in the marketplace during the quarter was another reason for the decline in net take-up. In Central / admiralty, occupied stock showed another contraction over three quarters, releasing 70,000 sq ft of grade a office stock following a positive net take-up of 126,000 sq ft in 2Q 2012. although demand has softened for top-tier buildings in Central, leasing enquiries from small to medium-size companies with areas between 2,000 and 6,000 sq ft, picked up. In contrast, positive net-take up was seen in the Wanchai / Causeway Bay, Island east, tsim sha tsui and kowloon east areas.

source of demandCompanies such as hedge funds, recruitment firms and legal firms were the key source of demand on hong kong Island. newcomers were mainly finance-related companies who looked for office premises with areas of about 3,000 sq ft. meanwhile, legal firms were still expanding in Central but the pace has slowed in 3Q 2012 compared to the previous two quarters. In tsim sha tsui and kowloon east, tenant demand came from relocation and consolidation as well as upgrading. among different tenants, sourcing and insurance companies were the main drivers for the uptake of grade a office space in 3Q 2012, requiring office units with large floor plate size in general.



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Source: Rating and Valuation Department (1985-2011); Colliers (2012-2014)

supply conditionstWo buildinGs completed in 3Q 2012Completed in July 2012, 28 hennessy road in Wan Chai, developed by swire Properties, added a total of 102,240 sq ft of net floor area to hong kong Island’s grade a office market. moreover, the occupation permit for elite Centre in kwun tong was issued in august 2012, adding about 184,340 sq ft of net floor area to the market. For 2012 as a whole, 1.13 million sq ft of grade a office stock will be provided. By the end of 2012, the scheduled completion of CCB tower in Central and one Pacific Centre in kwun tong will provide a total net floor area of about 373,570 sq ft.

no supply on honG konG island in 2013looking into 2013, there will be no new supply on hong kong Island. the coming new supply will focus on four new developments in kowloon east, one in Cheung sha Wan and another in kwai Chung, totalling 1.48 million sq ft of net floor area. the scarce supply of grade a office premises will continue in 2014; only three new office developments of 570,000 sq ft of net floor area are expected to be completed



Source: Colliers Note: Demolition: Demolition work is actively undergoingUnder construction: Construction activity, including either foundation or superstructure, are undergoing on siteUnder planning (Existing Building): Building plan for a site, currently occupied by a tenanted building, is approved by the GovernmentUnder planning (Vacant Building): Building plan for a site, currently occupied by an empty building, is approved by the GovernmentUnder planning (Bare Site): Building plan for a bare site is approved by the GovernmentCompleted: Construction is completed and an occupation permit is issued by the Government

Grade a office supply (2012 – 2015 and beyond)

buildinG districtnfa

(sq ft)deVeloper status

2012 New Supplyhysan Place Causeway Bay 241,500 hysan Development Completedking Palace Plaza kwun tong 231,333 Billion Development Completed28 hennessy road Wan Chai 102,240 swire Completedelite Centre (20-24 hung to road) kwun tong 172,052 sun hung kai Properties CompletedCCB tower Central 170,000 lai sun/China Construction Bank Under construction

one Pacific Centre kwun tong 203,570 hk Pacific Investment Under construction

2012 total 1,120,6962013 New Supplykowloon Commerce Centre - tower B kwai Chung 414,800 sun hung kai Properties Under construction181 hoi Bun road kwun tong 262,650 sun hung kai Properties /

Wong's InternationalUnder construction

135-137 hoi Bun road kwun tong 189,765 sundart Int'l holdings Under construction10 shing Yip street kwun tong 209,368 Billion Development Under construction6 Wang kwong road kowloon Bay 224,900 Billion Development Under construction

2013 total 1,301,4842014 New Supply10 Cheung Yue street Cheung sha Wan 176,581 Billion Development Under construction52-56 tsun Yip street kwun tong 305,989 Billion Development Under construction15-17 Chong Yip street kwun tong 226,480 Billion Development Demolition

8 Connaught Place Central 40,700 hongkong land Under construction

2014 total 749,750

2015 & BeyoNd New Supply10 harcourt road Central 419,468 hutchison Under planning

(existing hutchison house)70 Queen's road Central Central 156,641 Wheelock Under planning

(existing Crawford house)38-52 Queen's road Central Central 167,292 new World Development Under planning (existing manning

house and loke Yew Building)10 Chater road Central 514,342 hongkong land Under planning

(existing Prince's Building)979 king's road, taikoo Place taikoo Place 1,712,743 swire Properties Under planning (existing Warwick

house, somerset house, Cornwall house)

180 Wai Yip street (ktIl 174) kwun tong 407,324 sun hung kai Properties / Wong's International

Under planning (existing Wong's Industrial Centre)

nkIl 6269 kwun tong 741,297 Wheelock Under Planning

98 how ming street (ktIl 240) kwun tong 972,243 transport International holdings / sun hung kai Properties

Under planning (existing Bus Depot)

123 hoi Bun road kwun tong 506,782 Wheelock Under planning (existing Wharf t & t square)

14 Wang tai road kowloon Bay 193,749 First group Under planning (existing niche Centre)

nkIl 6314 kowloon Bay 681,890 goldin Under Planning

2 ng Fong street san Po kong 267,082 Billion Development Under planning (existing Unimix Industrial Centre)

kIl 11111 hung hom 471,997 Wheelock Under Planning

sttl 463 shek mun 344,000 Billion Development Under Planning

2015 & Beyond total 7,556,850



Vacancy

Source: Colliers

Grade a office Vacancy rates (by sub-markets)

district total stock(million sq ft) 3Q 11 4Q 11 1Q 12 2Q 2012 3Q 2012

Central / admiralty 21.6 3.5% 3.8% 5.7% 5.1% 5.5%

Wan Chai / Causeway Bay 11.4 2.4% 2.4% 1.6% 3.1% 3.8%Island east 10.9 4.5% 3.9% 4.2% 2.9% 2.6%sheung Wan 1.6 3.9% 4.0% 3.6% 1.5% 1.7%tsim sha tsui 6.6 2.6% 1.9% 2.9% 1.7% 0.9%kowloon east 9.0 12.9% 12.5% 10.3% 10.9% 9.6%overall 60.9 4.7% 4.6% 5.0% 4.7% 4.7%

Note: Floor area on net basis

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Source: Colliers

oVerall Vacancy stalled the overall vacancy rate was virtually stalled in 3Q 2012, due to the sustained demand from new, finance services-related start-ups and moderate expansion demand from the legal sector on the back of tight supply of available stock for lease. however, the vacancy rates for submarkets on hong kong Island generally trended downwards, while relocation of cost-sensitive tenants pushed down vacancy rates in tsim sha tsui and kowloon east.

sub-market performancethe falling rent affordability of Central grade a office tenants and subsequent softening of demand for grade a office space caused the vacancy rate to rise 40 basis points from 5.1% to 5.5%. meanwhile, the completion of 28 hennessy road in Wan Chai added about 102,240 sq ft of net floor area to Wan Chai / Causeway Bay district. the grade a office vacancy rate in the district increased 70 basis points to 3.8% during the quarter. on the contrary, tsim sha tsui and kowloon east performed well, with vacancy rates falling 80 and 100 basis points, respectively, thanks to the relocation of tenants for various reasons: downsizing, consolidation and/or upgrading.

Vacancy forecast Due to the limited supply of grade a office buildings for lease for the rest of 2012, the vacancy rate on hong kong Island will remain low, with the exception of Central / admiralty, where falling demand for top-tier office premises is anticipated to cause the vacancy rate to edge up further during the next few months. overall, the average vacancy rate is projected to hover at around its historical average of 5.0% by the end of 2012.



Source: Colliers

Grade a office rentals (by sub-markets)

district 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 3Q 2012 (% QoQ)

Central / admiralty $113.5 $111.8 $109.9 $100.1 $98.1 $98.8 0.8%Wan Chai / Causeway Bay $58.1 $59.3 $59.7 $58.0 $58.8 $59.5 1.3%Island east $39.2 $40.6 $41.1 $39.5 $40.0 $40.5 1.2%sheung Wan $54.7 $54.7 $54.8 $54.7 $54.3 $52.8 -2.7%tsim sha tsui $42.7 $44.8 $44.9 $45.6 $46.5 $49.0 5.4%kowloon east $28.8 $29.8 $31.3 $31.4 $32.2 $33.0 2.8%overall $67.9 $67.9 $67.6 $63.9 $63.4 $64.4 1.5%

Source: Colliers

rent trend

rents rebounded after fallinG for three Quarters Despite fewer leasing transactions being concluded during the quarter, market sentiment was generally positive across all submarkets. the overall grade a office rent rebounded in 3Q 2012 after falling for three consecutive months, rising a solid 1.5% QoQ .

central market picked up the average grade a office rent in Central / admiralty showed its first quarterly gain since 3Q 2011, rising 0.8% QoQ in 3Q 2012 to hk$98.8 per sq ft per month. the rise was driven by demand from new set-ups and expansionary demand from the legal sector, albeit at a slower pace compared to the previous quarter. Without a clearer economic outlook, landlords were unwilling to further reduce their asking rents, particular for buildings with low vacancy. meanwhile, Central / admiralty tenants prefer to stay in the same district upon lease renewal or downsizing due to the limited available stock for lease in other locations and unjustified relocation costs. knowing that, the market saw less relocation movement from Central / admiralty to other submarkets during the quarter.

tsim sha tsui outperformed among all submarkets, rents in tsim sha tsui showed the strongest growth at 5.4% QoQ in 3Q 2012. on the back of its extremely low vacancy, any prominent leasing deals concluded in the market would push up rents in the tsim sha tsui grade a office market. For instance, an insurance company from Island east and a sourcing company from kwun tong relocated to tsim sha tsui, taking up 40,000 to 50,000 sq ft each. moreover, landlords in kowloon east raised their asking rents for large floor size units in view of the strong demand and tight supply imbalance. In contrast, grade a office rents for units that are less than 10,000 sq ft in kowloon east were still competitive.

rent forecast In the wake of positive signs from the Central grade a office market, the overall grade a office rent is bottoming out. although individual companies are reducing staff in light of a deteriorating business environment, there was no major headcount reduction. Clouded by the uncertain economic outlook, Central / admiralty rents are expected to stay flat for the rest of the year, taking into account the falling rent affordability of top-tier buildings and the rising vacancy rate. however, the other submarkets should remain resilient and tsim sha tsui is expected to outperform other submarkets due to high demand from relocation tenants coupled with limited stock available for lease in the district. For the whole year of 2012, the overall grade a office rent is projected to undergo only a mild downward adjustment of 3%.

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Source: EPRCNote: Investment sales transactions with lump sums of HK$30 million or above

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Source: Rating and Valuation Department, HKSAR Government

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investment Marketmarket VolumeWith the external uncertainties and tightening of mortgage lending criteria, investment sentiment in the office market weakened during 3Q 2012. the total value of investment sales transactions for a lump sum consideration of more than hk$30 million each contracted 41% QoQ to hk$6.9 billion in 3Q 2012.

inVestment rationale the most significant en bloc transaction during the review period was the sale of tung shun hing Commercial Centre in tsim sha tsui to a local investor for hk$1,088 million. Based on a total gross floor area of 51,980 sq ft, the average price was hk$20,931 per sq ft. the buyer plans to redevelop the existing building into a ginza-type commercial building mainly for retail use. Based on the current rental income, the initial yield is below 2% per annum. the rental yield is expected to increase to 3.1% per annum after redevelopment.

another major en bloc transaction was the sale of tsuen Wan hoover Plaza, a 15-storey commercial building in tsuen Wan to a local investor for hk$515 million. Based on a total gross floor area of 88,425 sq ft, the average price was hk$5,818 per sq ft. the buyer plans to convert the existing building into a ginza-type commercial building. after repositioning, the rental yield is expected to increase to 3.7% per annum from the current level of less than 2% per annum.

regarding strata-title sales, the kowloon Commerce Centre tower B in kwai Chung by sun hung kai Properties recorded six transactions involving 13 floors in total. the average prices of these transactions were in the range of hk$6,000 - 7,300 per sq ft. the average prices of brand new office buildings in kowloon east are mostly above hk$8,000 per sq ft. the relatively low price in the kowloon Commerce Centre attracted a group of buyers acquiring the premises for investment or owner-occupation purposes. For example, the open University of hong kong acquired five floors in kowloon Commerce Centre tower B for about hk$756.96 million. Based on a total floor area of 124,353 sq ft, the average price was about hk$6,087 per sq ft.

office yield according to the rating and Valuation Department, the average yield of hong kong grade a offices compressed 20 basis points, from 3.3% in april to 3.1% in July 2012. the decrease in grade a office yield reflected that the demand for grade a office premises from investors remained strong during the quarter.



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Source: Colliers

Market outlookthe current market performance is consistent with our prediction that the prevailing consolidation period for grade a office rents will be shorter, due to the positive market sentiment and increased leasing enquiries. however, tenants remained cost-cautious due to the headwinds from a contracting european economy and the sluggish Us economic growth.

after falling 13% since mid-2011, Central / admiralty rents showed signs of stabilising during 3Q 2012. In fact, compared to western economies, hong kong’s sound economic fundamentals will offer a brighter business prospect and continue to attract companies from across the globe. For those who want to do business in mainland China and across the region, hong kong is well placed to be the base for these companies. therefore, we expect rents to rebound in 2013 on the back of scarce supply and positive demand. Considering an increased level of lease expiry cases next year and a brighter economic outlook, market activity is expected to pick up and overall grade a office rent is projected to climb 6% over the next 12 months.

hong kong | 3q 2012 | reSideNtial



luxury residential sector

Source: HSBC

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luxury residential sales actiVity sees deeper decelerationIn the midst of global economic uncertainty and the hong kong government maintaining austerity measures, sales activity in the local residential market slowed in 3Q 2012, with the number of sales and purchase agreements of residential units falling 29.5% QoQ to 19,682 during the three-month period ending august 2012. In the luxury segment, sales activity experienced a deeper deceleration. the number of luxury residential sales transactions over hk$20 million in the three traditional luxury districts of the Peak, mid-levels and south side dropped by 35.7% QoQ during the same period. meanwhile, the number of sales transactions in the top-end market (referring to sales transaction of properties at over hk$100 million) remained stable.

pent-up demand indicated by price and Volume diVerGence Despite falling sales volume, the low interest rate environment, low unemployment rate and sustained income growth continued to support property demand and prices. the heated market was influenced by three unusual forces: a weak global economy, abundance of liquid capital and keen demand. the end-user demand had been effectively suppressed by tightening policy measures since 2010 and the pent-up demand was indicated by the divergence between transaction volume and prices.

sales Market



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Source: Colliers

Source: Colliers

luxury residential prices (by sub-markets)

district 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 3Q 2012 (% QoQ)

the Peak 285 298 315 330 336 330 323 329 334 1.6%

mid-levels 188 199 206 214 217 207 203 221 223 1.1%

south side 263 273 276 282 279 272 261 271 278 2.6%

overall 244 255 264 274 275 269 263 277 282 2.0%

(hk$ / sq ft)

During 3Q 2012, luxury residential prices grew by 2.0% QoQ as of august 2012, following the 5.2% QoQ increase in may 2012.



Source: Colliers

maJor residential sales transactions

month propertyGfa

(sq ft)price

(hk$ m)unit price

(hk$ / sq ft)

the peak

Jun-12 strawberry hill, house 13 3,190 165.00 51,724

aug-12 opus hong kong, 8/F 6,200 470.00 75,806

aug-12 kelletteria, house e 3,198 155.00 48,468

aug-12 72 mount kellett road, house B na 283.00 na

aug-12 8-12 Peak road, Block a1, 3/F, Flat a 2,980 86.50 29,027

aug-12 27 lugard road 12,460 383.80 30,803

South Side

Jun-12 twin Brook, 6/F, Flat B 2,700 84.00 31,111

Jun-12 royal garden, 7/F, Flat B 2,680 89.00 33,209

Jun-12 scape 4,578 250.00 54,609

Jun-12 somerset, 29/F, flat a 3,099 88.00 28,396

Jun-12 redhill Peninsula - Palm Drive, house 36 2,588 69.38 26,808

Jul-12 grenbelle garden, house 9 3,273 120.00 36,664

aug-12 Pine Crest, 10/F, Flat B 2,250 69.20 30,756

aug-12 stanley Court, house 23 2,859 55.00 19,237

aug-12 radcliffe, 15-16/F 3,620 59.38 16,403

mid-levelS

Jun-12 Chantilly, 12/F, Flat B 3,600 108.99 30,275

Jun-12 39 Conduit road, 32/F, Flat a 3,284 130.05 39,600

Jul-12 seymour, 58/F, Flat a 2,348 72.79 31,000

Jul-12 kennedy Park at Central, 27/F, Flat a 2,478 89.69 36,193

Jul-12 Villa monte rosa, Block C, 11/F, Unit 1-2 4,600 90.50 19,674

aug-12 kennedy Park at Central, 29-30/F, Flat a 3,866 188.00 48,629

aug-12 kennedy Park at Central, 9/F, Flat a 2,478 71.12 28,700

aug-12 grenville house, Block C, D, 9/F, Flat C 3,700 90.00 24,324

aug-12 tregunter tower, tower 3, 55-56/F, Flat C 3,798 96.80 25,487

aug-12 seymour, 59/F, Flat B 1,888 58.53 31,000



new Government Measures

timeline neW measures

five short-term steps

october - December 2012

sites providing 2,650 flats will be included in the land sale programme for october to December. about 1,760 of the flats are from six sites and no fewer than 894 are from the mtr's residential project at the tsuen Wan West station on the West rail line.

early 2013applications for the purchase of 830 home ownership scheme (hos) surplus flats, 825 of which are at tin Chung Court in tin shui Wai, will begin in early 2013.

early 2013the my home Purchase Plan will be amended by changing the rent-to-buy scheme to sell the first batch of 1,000 flats in tsing Yi directly. the flats will be available in early 2013, and families who earn $40,000 or less a month will be eligible to apply.

2013a Chai Wan industrial building will be converted into a public block of 180 rental units in 2013. the Urban renewal authority (Ura) will launch two pilot schemes next year to redevelop industrial buildings into flats and commercial offices.

Present up to 2016applications for pre-sale consent will be speeded up to release 65,000 flats in the private market over the next three to four years.

five medium-term steps

-a recreation site in Cheung sha Wan will be used for 2,300 public rental homes so the provision of such units can be put forward two years.

2017480 units under the Ura’s kai tak unit exchange programme will be allocated to the housing authority to develop home ownership scheme flats for completion in 2017.

-the government plans to sell the remaining 4,000 "rent-to-buy" scheme units planned by the previous administration.

-a total of 36 sites, zoned for "government, institution and community" uses, will be used for private and public housing projects to provide about 11,900 units.

-town planning procedures will be streamlined to speed up housing authority and Ura projects to rejuvenate industrial buildings for homes.

packaGe of 10 short- to medium-term measuresChief executive leung Chun-ying has been pledging to boost the supply of homes in order to keep housing affordable since he came to power in July 2012. on 30 august, the government presented a package of 10 short- to medium-term measures to expedite the sale of subsidised and private residential units to meet public demand.

property market defied GoVernment’s effortsthe 10-point package is just too weak to cool the property market. It will not have an immediate impact on short-term housing supply and it will not result in a short-term price correction, but it is heading in the right direction. the moves are what the market has long demanded, but the strength is just not sufficient. In the remaining half of 2012, property prices will be supported by solid economic fundamentals, low unemployment rate and sustained income growth.

Source: HKSAR Government



site 1, kai tak area 1h site 2, kai tak area 1h

site area (sq ft) 83,658 92,420

developable floor area (sq ft) 418,290 462,100

usage residential (group B)

plot ratio 5

height restriction (m) 110

site coverage (%) 40

number of units to be built 1,100

“honG konG land for honG konG people” in kai tak deVelopment on 6 september, the government announced that it will put two residential plots at the kai tak development area up for sale in 1Q 2013 as part of the “hong kong land for hong kong People” initiative, by which only permanent hong kong residents would be allowed to own units for the first 30 years.

demand-supply imbalance to continuethis initiative will provide more affordable housing but will not bring the demand-supply level into balance or tame soaring prices. “hong kong land for hong kong People” is taken from plots originally earmarked for ordinary private housing. a potential unintended consequence includes the reduction in the amount of land available for ordinary private housing development, which can, in turn, intensify property price increases.

further tiGhteninG policy by hkmaon 14 september, the hong kong monetary authority announced further tightening policies to offset the possible inflow of hot money from Qe3.

1) the maximum debt servicing ratio (monthly loan instalment-to-income ratio for the household) will be lowered from 50 to 40% if the local second home is purchased for investment purposes and the buyer still has an outstanding mortgage on a first property. If the intention of buying a second flat is for owner-occupation or upgrading, the above regulation does not apply.

2) For mortgage loans based on the net worth of a mortgage applicant, the maximum loan-to-value (ltV) ratio will be lowered from the current 40 to 30%. For mortgage applicants whose principal income is derived from outside hong kong, the applicable maximum ltV ratio will be lowered by 20 percentage points, instead of the current 10 percentage points.

luxury seGment Will see sloWer demand the new property lending tightening measures are not intended to cool property prices but to protect the financial system stemming from rising risks in the property market. they ensure that local home buyers are not over-leveraged and prevent overseas investors from speculating in the hong kong markets. loan-to-Value ratio is lowered for home buyers whose incomes are derived from outside hong kong – this category will be non-hong kong residents not working in hong kong, i.e. mainland investors. given that mainland buyers are more focused on high-end residential properties, the new policies will not result in a significant price correction but will further slow demand at the luxury end.

Source: HKSAR Government



leasing Demand non-financial companies remain the key driVerthe non-financial companies, such as fashion and apparel, It, trading or pharmaceutical enterprises, continued to be the key driver of the residential leasing market, as turbulence in the global economy has greatly reduced the role played by the financial sector. During 3Q 2012, residential buildings with 1 - 2 bedrooms or mid-sized units, which are associated with the non-financial sectors, remained sought after. meanwhile, those relying on the financial sector (i.e. large-sized apartments or houses) had more vacancies. Due to seasonal factors, there were less expatriate arrivals compared to the previous quarter subsequent to the opening of the school year.

feWer budGets for non-financial companies overall housing budgets remained stable in 3Q 2012 compared to the previous quarter after the budget cut across the board at the end of last year. as of the end of 3Q 2012, budgets for staff at junior levels ranged from hk$20,000 to 40,000 per month, middle management levels from hk$40,000 to 130,000 and senior executives hk$130,000 and above per month. although tenants from non-financial companies were more active, budgets from these tenants had not yet matched those from the financial sector. In addition, multinational corporations retained their tightened housing budgets for staff at all levels considering the uncertain business conditions.

staGnant rents – but houses Were more neGotiablethe overall luxury residential rents registered a mild decline of 0.9% QoQ as of august 2012.

Source: Colliers

luxury residential rentals (by sub-markets)


the Peak 164 172 184 201 207 201 192 197 195 -1.0%mid-levels 133 137 143 145 149 142 140 139 136 -2.2%south side 153 157 161 168 171 166 157 157 157 -0.2%overall 149 153 158 165 169 163 158 158 157 -0.9%

landlords of houses with rents at hk$200,000 or above, became more willing to negotiate in the wake of growing downside risks of global economic turbulence and decreasing expatriate demand from the banking and financial industries which have higher housing budgets.

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Source: Colliers



maJor residential lease transactions

month property district Gfa(sq ft)

rental(hk$ / month)

unit rental(hk$ / sq ft /

month)Jun-12 tavistock mid-levels 4,880 250,000 51.23

Jun-12 Branksome grande mid-levels 3,030 125,000 41.25

aug-12 Queen's garden mid-levels 2,830 130,000 45.94

Jun-12 no. 127 repulse Bay road south side 2,990 110,000 36.79

Jul-12 the lily south side 1,966 132,000 67.14

Jul-12 repulse Bay apartment south side 2,465 100,000 40.57

Jul-12 harston, the repulse Bay south side 2,765 122,000 44.12

aug-12 hong kong Parkview south side 2,580 133,000 51.55

aug-12 stanley green south side 2,200 100,000 45.45

aug-12 Four seasons Place Central 1,450 116,600 80.41

Source: Colliers

investment Market yield compression overall, luxury residential yield of the three traditional luxury residential districts edged down from 2.58% in may 2012 to 2.51% at the end of august 2012, indicating that the growth rate of luxury residential prices had outperformed rents during the quarter.

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Source: Colliers

regarding land sales, a total of six sites were sold via tender during 3Q 2012, in which all sites were designated for residential use; none of the sites were located in the traditional luxury residential districts of the Peak, mid-levels and south side.



Source: Lands Department, HKSAR Government

GoVernment land sale results 3Q 2012 – residential sites Via tender

date lot no. locationmaximum

Gfa(sq ft)

lump sum (hk$ m)

accommodation Value

(hk$/sq ft)purchaser

Jul-12 Il 9027 Java road and tin Chiu street, north Point, hong kong

900,678 $6,910 $7,672 shkP

aug-12 tkotl 115 area 66D1, tseung kwan o, new territories

297,532 $1,169 $3,929 k.Wah

aug-12 sttl 567 area 56a, kau to, sha tin, new territories

318,082 $3,038 $9,551 manhattan group & Wing tai Properties

aug-12 lot no. 678 in DD Peng Chau

Peng lei road, Peng Chau, new territories

55,973 $81 $1,444 Well Power electronics ltd

sep-12 tkotl 117 area 66C2, tseung kwan o 486,565 $2,285 $4,696 sino land and k. Wah sep-12 lot 674 in DD

Peng Chau tung Wan, Peng Chau 14,372 $31 $2,157 sino land

Source: : MTRC

Source: Lands Department, HKSAR Government

sites to be offered for GoVernment tenders betWeen october and december 2012

locationsIte area

(sq ft)

deVelopable floor area

(sq ft)

no. of units to be proVided

estimated price (hk$ m)

estimated *aV(hk$/sq ft)

tseung kwan o area 68a2 229,338 573,344 600 $2,290 - $2,980 $4,000 - $5,200tseung kwan o area 68a1 171,890 429,726 600 $1,720 - $2,230 $4,000 - $5,200area 56a, kau to, sha tin (site B1) 92,463 142,386 120 $1,280 - $1,420 $9,000 - $10,0007 kwun Chung street, Jordan 2,917 26,275 80 $140 - $306 $5,500 - $12,000Junction of so kwun Wat road and kwun Chui road, tuen mun

301,392 391,809 178 $1,180 - $2,350 $3,000 - $6,000

sha kok mei, sai kung 167,918 251,877 178 $2,520 - $3,020 $10,000 - $12,000

*Accommodation Value

upcominG tenders by mtrc

locationsIte area

(sq ft)

deVelopable floor area

(sq ft)

no. of units to be proVided

estimated price (hk$ m)

estimated *aV(hk$/sq ft)

tsuen Wan West (tW6) 149,351 807,946 894 $3,230 $4,000

*Accommodation Value



proJected neW supply of luxury residential units in 2012

deVelopment house* apartment* deVeloper / oWnerno. of units

status

the peak

35, 37, 39 severn road 42 Plantation road 3 @ 2-s,

4 @ 3-s

- shkP 7 Completed

1 gough hill road 3 @ 3-s - lucky Beat Investment ltd 3 Completed72 mount kellett road 3 @ 2-s - sea holdings limited 3 Completed7, 9, 11, 15 mount kellett road 3 @ 4-s 1 @ 5-s nan Fung 13 Completed

10 & 12 mount kellett road 12 @ 3-s - shkP 12 Completed28 Barker road 7 @ 3-s - hutchison Whampoa limited 7 Under Construction

South Side

9 shouson hill road 31 @ 3-s - shkP 31 Completed21 tai tam road - 1 @ 9-s newman Investment Co ltd 14 Completed50 stanley Village road 12 @ 3-s - shkP 12 Completed6 south Bay road 1 @ 4-s hosanto Investmenets ltd 1 Completed4 shek o headland road 4 @ 3-s - Century sino International ltd 4 Under Construction20 repulse Bay road 1 @ 4-s - lavender rose ltd. 1 Under Construction60-62 Chung hom kok road - 1 @ 4-s supreme Faith ltd 6 Under Construction12 stanley mound road 2 @ 3-s - newtown Investment Co ltd 2 Under Construction18 Carmel road 1 @ 4-s - horizon east Investment ltd 1 Under Construction

mid-levelS

10 Bowen road 1 @ 4-s - tyronie ltd 1 Completed16-18 Bonham road - 1 @ 30-s Queen Cheers Development ltd 12 Completed38-44 Caine road - 1 @ 31-s Fine mean ltd 106 Under Construction4, 4a, 6, 6a Castle steps, 2a-e seymour road,

23, 25, 27, 29 Castle road

- 1 @ 44-s swire Properties 126 Under Construction

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Source: Colliers

* No. of block @ No. of storey Source: Colliers

supplythere was no significant improvement in the prevailing tight supply situation in the luxury sector in 3Q 2012. as of august 2012, the overall luxury residential new supply between 2012 and 2014 was 54% below its long-term average of 536 units.



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Source: Colliers

Market outlookthe ultra-low interest rate, low unemployment rate and sustained income growth in hong kong will continue to support residential demand and prices. the low interest rate environment is expected to continue until 2014 - 15, prompting property prices upward, but the momentum will be moderated by residential supply measures. the end-user demand had been suppressed by tightening policy measures since 2010, including the special stamp Duty (ssD) and lowering of the ltV ratio, which has effectively curbed the secondary sales market. the spill-over of demand from the secondary market to the primary will skew towards the mass sector.

In the luxury segment, tight supply will continue to fuel demand and prices. however, the new policy to prevent overseas investors from speculating in hong kong, aimed at mainland buyers who are more focussed on high-end properties, will not lead to a significant price correction but will further slow the demand for luxury homes. In general, the average luxury residential prices are predicted to increase by 5% over the next 12 months. In the leasing market, multinational corporations, from the banking and financial industries in particular, will remain cautious in hiring due to uninspiring global economic conditions. overall housing budgets will remain tight and expatriate family arrivals from the banking and financial industries will stay low, leading to falling demand for luxury houses. on the other hand, the inflow of expatriates from non-financial companies will remain the key contributor to the luxury leasing market. as such, the average luxury residential rent is expected to see a moderate downward adjustment of 5% over the next 12 months.

hong kong | 3q 2012 | iNduStrial


industrial sector

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Source: Census and Statistics Department, HKSAR Government

Source: Civil Aviation Department; Marine Department, HKSAR Government

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Mild Decline in external tradethe eurozone sovereign debt crisis caused a notable drag on global economic activity. the delicate economic and fiscal conditions in the advanced economies as well as their negative spill-over into asia clouded the global trading environment. Consequently, hong kong’s external trade suffered a negative impact.

During the period from June to august 2012, the total value of re-exports declined 2.4% year-on-year (YoY) to hk$850 billion, compared to the growth rate of 1.7% in the preceding three-month period. taking a closer look, hong kong’s re-exports trade recorded negative year-on-year growth of 4.7% and 3.5% respectively in June and July 2012. In august 2012, the re-exports trade volume edged up 0.7% YoY.

mixed performance was seen on the cargo throughput front. During the period from June to august 2012, air cargo throughput increased 1.8% YoY to 997,000 tones, accelerating from virtually zero positive growth in the preceding three-month period. however, container throughput dropped 8.3% YoY to 5.9 million teUs during the period from June to august 2012, compared to a YoY decline of 1.2% in the preceding three-month period.



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Source: Census and Statistics Department, HKSAR Government

leasing Demandsustained demand for Quality Warehousesthe sustained local retail sales growth continued to support the warehouse sub-sector. the demand from third-party logistics companies for warehouse premises remained steady in 3Q 2012. some major corporations are seeking to outsource their logistics functions. several third-party logistics companies are searching for quality warehousing premises in order to capture the demand growth for logistics services from the outsourcing sector. according to our research, this group of tenants is looking for high-quality warehouse premises with sizes in the range of 30,000 to 50,000 sq ft. Following the completion of Interlink in march 2012, some of the tenants of Interlink have been relocating their operations to the new facilities while releasing portions of their existing warehouse premises back to the marketplace. In view of the lack of new prime-quality warehouse supply in the near term, some logistics operators committed to lease these vacated or yet to be vacated premises. according to our research, all of the existing premises that will be released by the tenants of Interlink have been absorbed. Currently, the ramp access warehouses are virtually fully occupied.

on the factory market front, more landlords opted to convert the whole block of their industrial buildings to other uses. these property owners plan to vacate their buildings in order to carry out the conversion work. similar to the previous quarter, the tenants in these buildings are looking for suitable premises for relocation, which in turn stimulates the industrial leasing market activity. however, this group of occupiers are seeking premises with sizes similar to their existing addresses.



Source: Buildings Department, HKSAR Government

completed neW buildinGs for Which occupation permits haVe been issued

district addressGross floor

area (sq ft)buildinG type

applicant / deVeloper

issue month

tsuen Wan 9 hoi shing road and 54 - 64 Chai Wan kok street

585,076 Industrial Wheelock June 2012

tseung kwan o Junction of Chun Ying street and Chun kwong street

296,004 Data centre hong kong stock exchange august 2012


neW buildinGs for Which consent to commence Work has been GiVen




commence month

tseung kwan o 7 Chun Cheong street 60,543 Factory extension global China Properties holdings ltd

June 2012

tseung kwan o Chun Cheong street (tkotl 39 ss ss 5)

473,406 global network centre

China mobile august 2012


neW buildinGs for Which plans haVe been approVed




approVal month

tuen mun 133 lung mun road 30,357 Warehouse on Fat lung electrical & metal august 2012

tai Po 17 Dai shing street 19,301 Factory extension hong kong Yamazaki Baking august 2012

an industrial building and a data centre were completed during the review period. occupation permit for the hong kong stock exchange’s new data centre in tseung kwan o was issued in august. the hong kong stock exchange will retain majority of the space for its own use while a portion of the space will be available for lease to external financial services companies.

Demand from end users and investors for new industrial premises remained strong. Wheelock offered one midtown, a brand new industrial building in tsuen Wan completed in June 2012, for strata-titled sale. according to the developer, all of the industrial premises in the building were sold. together with the car parking space transactions, the proceeds of the sale were over hk$2.5 billion.

supply



Source: Colliers

Source: Colliers

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(hk$ / sq ft / month) (% QoQ)(hk$ / sq ft / month)

industrial rentals (by sub-markets)

sub-market 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 3Q 2012(% QoQ)

factory 8.56 8.72 8.85 8.96 9.12 1.8

cargo lift access Warehouse 6.82 7.14 7.45 7.71 8.06 4.6

ramp access Warehouse 9.81 10.34 10.83 11.26 11.80 4.8

i-o building 12.93 13.21 13.41 13.57 13.82 1.8

(hk$ / sq ft / month)

rent GroWth acceleratedsimilar to the previous quarter, limited availability of quality stock and sustained demand from third-party logistics companies continued to underpin the rent performance of warehouses premises, especially those with the physical provision of ramp access. Warehouse rent growth accelerated to 4.6 - 4.8% QoQ in 3Q 2012 from 3.5 - 4.0% QoQ in the previous quarter.

on the factory market front, the increase in leasing market activity due to wholesale conversion of industrial buildings for other uses has supported the rent performance in 3Q 2012. rent growth edged up to 1.8% QoQ in 3Q 2012 from 1.2% QoQ in the previous quarter. Benefitting from the positive spill-over effect of sustained rent growth in decentralised office premises, rent growth of I-o buildings edged up to 1.8% QoQ in 3Q 2012 from 1.2% QoQ in the previous quarter.

rentals



Source: Colliers

industrial prices (by sub-markets)

sub-market 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 3Q 2012(% QoQ)

factory 2,278 2,319 2,355 2,538 2,729 7.5

cargo lift access Warehouse 2,488 2,604 2,716 2,863 3,092 8.0

ramp access Warehouse 2,600 2,740 2,869 3,100 3,302 6.5

i-o building 3,332 3,405 3,456 3,595 3,856 7.3

(hk$ / sq ft)

Source: EPRC

sales Market

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sales market sloWs in 3Q 2012similar to the last quarter, banks are willing to offer financing support for acquiring industrial premises. In view of the sustained rent increase and low interest cost for acquiring and holding industrial premises, end users, especially small to medium size companies and investors, acquired industrial premises for owner-occupation and investment purposes. however, due to a decrease in the stock available for sale in the marketplace, the transaction volume declined in 3Q 2012.

During the three-month period ending in august 2012, the total value of strata-titled transactions declined 12.9% QoQ to hk$9,301 million. on the number of transactions front, strata-titled transactions dropped 26.3% to 1,887. although both the total value and number of strata-titled transactions decreased in 3Q 2012, they were above the long-term average levels since 1Q 2000 at hk$3,315 million and 1,263 transactions per quarter.

prices increase furtherUnderpinned by sustained demand from both end users and investors, industrial property prices increased further in 3Q 2012. During the period from June to august 2012, industrial property prices increased 6.5 - 8.0% QoQ, compared to 4.0 - 8.0% QoQ in the preceding three-month period.

Whole-block sales marketProperty owners are maintaining a positive view on industrial property market performance. the cash-rich owners are holding onto their premises in the current low interest rate environment, leading to a decrease in stock available for sale and a contraction in the whole-block transaction volume.

During the period from June to august 2012, only one whole-block transaction was recorded, down from eight transactions in the preceding three-month period. In august, a local manufacturer



Source: Rating and Valuation Department, HKSAR Government

Source: Colliers

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acquired the whole block of industrial buildings at 10 lok Yip road, Fanling from Chinachem group for a total of hk$455 million. Based on a total floor area of about 199,100 sq ft, the average price was hk$2,285 per sq ft.

yield stands at loW leVelaccording to government statistics, the industrial property yield stood at around 3.4 - 3.6% during the period from may to July 2012, edging down from the 3.6 - 3.7% recorded in the preceding three-month period. looking ahead, the implementation of the third round of Quantitative easing (Qe3) is likely to push the Us bond yields down further during the coming months. hong kong interest rates are anticipated to trend downwards as hong kong dollars are pegged to Us dollars. the industrial property yield trend is expected to follow suit, supporting further price increases in coming quarters.



revitalising industrial Buildings

executed special WaiVer cases

execution date location buildinG name user number of storeys

buildinG size(sq ft)

12 June 12 788 Cheung sha Wan road laws Commercial Plaza office and other uses 34 216,100

18 July 12 64 tsun Yip street south asia Industrial Centre office, shop and services,

eating Place

14 Information not

available

18 July 12 21 hung to road Infotech Centre office 22 114,000

three more executed special WaiVer cases recordedthe package of measures to revitalise industrial buildings continued to attract some owners to look into the potential of their single-owned industrial buildings, which are eligible for wholesale conversion to other uses or redevelopment under the scheme. as of the end of august 2012, 83 applications had been received by the lands Department since the launch of the new measures, including 70 applications for conversion and 13 for redevelopment.

of these applications, 22 special waiver (wholesale conversion) cases have been executed, while three of the cases were recorded during the period from June to august 2012. the owners plan to convert their buildings for office, retail and other uses. meanwhile, laws Commercial Plaza and Infotech Centre are the first two I-o buildings opting for wholesale conversion to other uses under the revitalising industrial building scheme.

In June 2012, the owner of hale Weal Industrial Building in tsuen Wan submitted a planning application to the town Planning Board for converting the existing 132,800-sq ft industrial building to “shop and services” use.

about tWo-thirds of executed cases located in koWloon eastamong the 22 executed conversions, 14 are located in kowloon east. meanwhile, five buildings opted for office use, seven for office / commercial use, one for retail use and one for hotel use. the reasons are twofold. First, there are more than 300 industrial buildings eligible for wholesale conversion in the district. second, kowloon east has come into the limelight due to the government’s determination to convert the district into a business hub via infrastructure development and town planning initiatives.

Under the “energising kowloon east” initiative, the government has planned to remodel the kowloon east and kai tak areas into a so-called “CBD2” providing over 58 million sq ft (gross floor area) of office premises – which will be more than double the existing office stock in Central, at about 23 million sq ft.

historically, the typical office tenant profile in kowloon east includes a wide range of small to medium size trading, logistics and technology companies. Due to a general lack of stock in traditional business districts on hong kong Island, the new prime-quality office buildings in kowloon east have attracted tenants from the insurance and financial services sectors moving across the harbour.

moreover, the ongoing transformation of kowloon east into a business district has attracted individual multinational corporations to establish their local or regional headquarters in the district. the change of office tenant profile in the district has attracted the building owners to apply for converting their eligible industrial buildings for office, retail, hotel and other uses at nil waiver fees under the revitalise industrial building scheme.

Source: Lands Department; Colliers



conversion into transitional accommodation

the local government plans to relax the building and town planning rules to make it possible to convert whole blocks of eligible industrial buildings into “transitional accommodation” at nil waiver fees in order to boost housing supply in the short to medium term.

the Chief secretary said in early september that there are about 1,400 industrial buildings eligible for wholesale conversion to other uses with about 700 of them located in the “other specified Uses (Business)” (oU (Business)) Zone. Under the current town Planning guidelines, residential use is not allowed on sites zoned for oU (Business) use. In addition, a regulation under the Buildings ordinance also prevents conversion as the plot ratio of industrial buildings is usually higher than the maximum allowed for residential use.

according to the Chief secretary, it would take six to 12 months to get the amended rules past the town Planning Board and legislative Council. according to the latest proposal, those 700 industrial blocks in the oU (Business) Zone would be eligible for wholesale conversion to “transitional accommodation” use at nil waivers after the rules are amended. these dwellings will be for rent and not for sale for at least 10 years and the operator of the transitional accommodation will have to exercise central management of the property.

“Wait-and-see” amonG buildinG oWnersJudging from the perspective of most industrial building owners, the latest proposal of wholesale conversion to “transitional accommodation” use is positive for the industrial property market. a group of building owners await the details of the latest proposal.

loft apartments, i.e. units that are generally built from former industrial buildings, have proven to be popular in some overseas markets as they are usually more spacious compared to traditional residential flats. But rents of loft apartments are not necessarily cheap.

the government’s latest proposal intends to provide more affordable housing options but there will be no restrictions on tenant types or rent level. If all technical barriers are removed, the introduction of “transitional accommodation” use in the oU (Business) Zone may create a niche loft apartment market that would provide landlords with better returns compared to the option of converting their premises into small affordable housing.



Market outlooklooking ahead, the persistently weak fundamentals of the advanced economies, including those relating to the debt crisis in the eurozone, will continue to cast a shadow over the global economic outlook. as such, hong kong's external trading environment will likely remain difficult in the near term.

on the industrial property market front, more end-users are on a tight budget for their business addresses in view of the uncertain economic performance in coming quarters. Industrial rental growth is anticipated to taper off in the coming months. Industrial rents are anticipated to increase 4 - 6% over the next twelve months.

the interest cost for acquiring industrial properties is anticipated to stay at a low level in view of the implementation of Qe3 in the Us and the dollar peg. In anticipation of rent growth of 4 - 6% over the next 12 months, industrial prices are expected to increase 7 - 10% during the period.


hong kong | 3q 2012 | retail

retail sector

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Source: Hong Kong Tourism Board

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Source: Census & Statistics Department, HKSAR Government

a Weaker spending sentiment the local retail sales market faced mounting challenges from the contracting eurozone and the still struggling United states. the economic slowdown in China has also created greater pressure, dampening buying sentiment in the local retail market, which has been reflected in the significant slowdown in retail sales growth. however, supported by the tight supply of prime shopping premises, the ever-rising inbound tourism and inflationary pressure, retail rents continued to increase, albeit at a slower pace in 3Q 2012.

inbound tourism continued boominGregardless of the headwinds from the global financial turmoil, the number of inbound tourists continued to soar. according to the latest figure released by the hong kong tourism Board (hktB), hong kong saw a total of 12.9 million inbound visitors during the three-month period ending august 2012, increasing by 18% YoY. In august 2012, visitor arrivals reached 4.90 million, breaking the single-month record, mainly driven by 3.73 million mainland Chinese visitors and accounting for 76% of total arrivals.

Gloomy Global outlook sloWs retail sales the growth pace of retail sales continued to slow, dragged down by less spending on luxury items amid the gloomy global economic outlook. In august 2012, the total value of retail sales slowed to 4.5% YoY, down from 8.7% YoY in may 2012. the market expects negative shocks from the global economic slowdown, and sustained inflation will continue to pose challenges for hong kong retailers.



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Source: Census & Statistics Department, HKSAR Government

caution WeiGhted on hiGh-end products In august 2012, the sales value of jewellery, watches, clocks and other valuable gifts fell 3.4% YoY, the first single-month decline since July 2009. on the other hand, sales of medicines and cosmetics rose by 17.4% YoY. aware of the global economic implications, Chinese consumers are treading cautiously. they are steering away from the hyper spending, tightening their belts and cutting back on some luxuries. luxury accessories are the first to go.

according to a survey conducted by a global research firm, luxury brand watches are the top item being crossed off of consumers’ shopping lists, with 54% of mainland respondents saying they plan to spend less on watches over the next 12 months. similarly, 48% of mainland respondents plan to reduce jewellery and high-end handbag purchases. however, it’s not all bad news across the board. the survey indicates that 43% of mainland respondents will still spend more on luxury cosmetics and expensive shoes, and 40% of them will buy more premium wines and cigars.

the strengthening of the yuan combined with hong kong’s lower tax rates suggest that hong kong will still attract mainland shoppers, especially those from second- and third-tier China cities where the presence of luxury retailers is still lacking.

cautious expansion amid Global uncertainties In the face of headwinds from the european debt crisis, international retailers continued their expansion plans but adopted a more cautious attitude. however, new overseas brands were still actively looking for prime locations in hong kong to set up their flagships before starting their ambitious expansion in China and the asia region. meanwhile, considering the weaker retail sales performance, landlords became less aggressive but still stood firm on rental negotiations on the back of the scarce supply of prime retail space in the traditional shopping locations.

therefore, tenants had no choice but to pay double or even triple the original rental rate upon lease renewal. For example, Chow sang sang Jewellery renewed its lease for a 700 sq ft g/F shop at 59 russel street in Causeway Bay, paying hk$2.2 million per month or an average rent of hk$3,143 per sq ft per month. the monthly rent of the previous lease was hk$730,000, translating to a 200% increase. In addition, omega renewed its lease at 10-12 Canton road in tsim sha tsui by doubling its previous rent (hk$3.416 million). the lease involved 6,504 sq ft retail space on g/F - 2/F, paying hk$6.8 million, or an average rent of hk$1,046 per sq ft per month.

a prominent leasing transaction during the quarter was highlighted by the lease of a ground-level shop at 54 - 64B nathan road, tsim sha tsui by rado, paying a monthly rent of hk$1.2 million. With a gross floor area of 1,000 sq ft, the average rent was hk$1,200 per sq ft per month. the premises were previously occupied by the Pearl shop & time Watch Company.



Source: Colliers* Street level shops on key street segments(Nov-2011 = 100)

retail rental index by maJor districts (*)


Causeway Bay 75 79 86 92 97 100 106 109 112 2.2%

Central 73 77 83 90 95 100 106 110 113 2.8%

mong kok 78 82 88 94 97 100 104 106 109 2.0%

tsim sha tsui 76 80 87 93 97 100 105 109 111 2.2%

overall 76 80 86 93 96 100 105 109 111 2.3%

Source: Colliers

prominent retail leasinG transactions in 2Q 2012

premises district floor rental(hk$ / month)

Gfa(sq ft)

unit rental(hk$ / sq ft /

month)tenant

54-64B nathan road tsim sha tsui g/F 1,200,000 1,000 1,200 rado

31 & 33 hankow road tsim sha tsui g/F 1,000,000 4,000 250 Canudilo

10-12 Canton road tsim sha tsui g/F - 2/F 6,800,000 6,504 1,046 omega

6-12 sai Yeung Choi street south mong kok g/F - 3/F 4,200,000 13,806 304 Bossini

18 russell street Causeway Bay g/F 1,500,000 1,000 1,500 longines

59 russell street Causeway Bay g/F 2,200,000 700 3,143 Chow sang sang

Note: Information from market sources

rental trend

rental GroWth remained intactgiven that local retail rents correlate highly to the retail sales performance, the slowed retail sales growth curtailed retailers’ business profit and hindered their ability to pay the skyrocketing rents. on the positive side, the extreme lack of prime shopping space for lease and sustained demand from luxury and fashion retailers continued to support retail rental growth. according to our research, the average retail rents in the four traditional shopping locations rose 2.3% QoQ in 3Q 2012, following a growth of 3.4% QoQ in 2Q 2012.

In august, the opening of the abercrombie & Fitch outlet in Central attracted a large crowd to the flagship store, pushing rents in the neighbouring streets up due to increased shopper traffic and the positive spill-over effect. In fact, second-tier streets in Central witnessed a strong increase in retail rents, which also outpaced that seen in the first-tier streets. nevertheless, weak consumer spending may curtail the future growth of retail rents and benefit local retailers that were forced out of the core locations during the last rally.



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Source: Colliers

investment Market activitylimited buyinG options in core areas subdued investment sentiment in 3Q 2012 resulted in significant reduction in the overall number and total consideration of investment sales of retail units – with a lump sum consideration of hk$10 million or above decreased by 42% and 53%, respectively. given the limited buying options in the prime shopping locations, investors sought investment opportunities in non-core districts. Both local investors and end-users continued to keep an eye on retail properties for medium- to long-term growth potential.

shop at haiphonG road achieVed record price Investors have shifted their focus to second- and third-tier streets in core shopping areas due to the limited buying options, driving up prices in these areas to record highs. In august, emperor group acquired a 750 sq ft shop at 35-37 haiphong road in tsim sha tsui for hk$363 million or hk$484,000 sq ft, fetching the highest unit price in kowloon. the 750 sq ft retail space is occupied by Bee Cheng hiang, a food store selling asia snacks, paying a monthly rent of hk$880,000 with a lease expiring in may 2015. the deal translates to an initial yield of 2.9% per annum. In addition, the shop was previously purchased by a local investor for hk$83 million in 2008. the new price represents a 337% increase during the period.



Source: Rating and Valuation Department

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yield compressionthe further compressed retail investment yield suggested that retail prices are growing at a faster rate than retail rents. the overall retail investment yield edged down 10 basis points from 2.7% in april 2012 to 2.6% in July 2012, according to the latest figures by the rating and Valuation Department. meanwhile, the average yield of prime retail premises in traditional shopping locations remained low at about 2.7%. In anticipation of a slowdown in retail sales growth and the subsequent retail rental growth, retail yield in the four traditional shopping districts will continue to edge down in the near term.



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Source: Colliers

Market outlookthe impact from the lingering european debt crisis is rippling through hong kong, clouding the outlook for the local retail market. more importantly, the slowed economic growth in China – the major source of booming demand for luxury jewelleries and watches – has taken a toll on retail sales as mainland tourists are cutting back on their past indulgences. even so, quality assurance, tax differences and the strength of the yuan means that luxury cosmetics, expensive shoes, premium wines and cigars are still attractive to mainland tourists.

although retail sales growth dipped amid rising global economic uncertainties, weaker consumer spending has yet forced retailers to slim down. a cautious leasing demand environment is expected to slow rental growth, which is also backed by a higher base of comparison. looking ahead, caution over the economic outlook will serve to scale back local consumption and visitor spending. however, a buoyant tourism industry, sustained demand from overseas retailers, an extreme lack of prime retail space, increasing household income and rising inflation should combine to create a positive environment for the local retail leasing market. overall, the average retail rent is expected to grow 10% over the next 12 months.

colliers international (honG konG) limited

suite 5701 Central Plaza18 harbour road Wanchaihong kongtel +852 2828 9888fax +852 2828 9899Company licence no: C-006052

simon loexecutive Director | research & advisory | asiatel +852 2822 0511fax +852 2868 5275email [email protected]

522 offices in 62 countries on 6 continentsUnited states: 147Canada: 37latin america: 19asia Pacific: 201emea: 118

• $1.8 billion in annual revenue in 2011

• 1,250 million square feet under management

• over 12,300 professionals

Copyright © 2012 Colliers International.

the information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. no responsibility is assumed for any inaccuracies. readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

hong kong | 3q 2012 | market overview

richard kirkemanaging Director | hong kongtel +852 2822 0699fax +852 2107 6047email [email protected] licence: e-279867

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