Every Cloud has a Silver Lining – Hong Kong Property Market Should Remain Resilient

Hong Kong (SANEPR.com) July 16, 2008 -- The local market is likely to remain cautious over the next six months, but sustained demand from both domestic market and strong economic support from China should save it from further dampening. Despite the patchy situation, Grade A office rental in core business districts should continue its upward trend to reach y-o-y increase of at least 20% and the luxury residential leasing market to appreciate 15-20% y-o-y by the end of 2008, according to CB Richard Ellis.

During the first six months of 2008, a total of 164 transactions worth over HK$100 million were recorded across all property sectors, an encouraging 41.4% surge compared with the corresponding period last year. The total consideration amounted to over HK$37.8 billion. Local investors contributed an overwhelming majority of 91.4% of the total value, with the remaining 8.6% registered through acquisitions by foreign investors.

High-end luxury residential properties accounted for approximately 34% of transactions in terms of value, while 31.8% of transaction values came from the office sector.

Investment Market
The property investment market continued to register buoyant performance in the first half of 2008 though the pace has been contained by worries from external sources.
Mounting inflationary pressure, amid a weak US and the pegged Hong Kong dollars, made real estate an attractive and stable investment alternative to capitalise on possible price appreciation in the long run. Fiscally sound local investors and institutional funds are still scouting for investment-worthy properties within specific targets according to their respective property portfolios. Although some investors may interpret the recent fluctuation of the stock market as a negative signal, many more investors continue to retreat their capital to the property investment as the latter is regarded as comparatively stable.

“The investment property sector is expected to remain cautiously positive as solid market fundamentals and comparatively healthy domestic economic performance should continue to show resilience against the macro uncertainties,” said Henry Lam, Executive Director of Investment Properties.

Office Market
The Grade A office market maintained positive momentum, though rental growth slowed somewhat across the board as at mid-2008. Central Grade A office rent surged 16.5% in the first six months of 2008, while the CBD fringe locations also performed well, particularly Sheung Wang, benefitting from the spill over effect of tenants relocating out from Central. However, rental gaps between non-CBD locations and Central remained wide, particularly those achieved in Grade A1 Central buildings, e.g. rentals in One & Two ifc, Cheung Kong Center, Chater House, York House and AIG Tower) have already exceeded HK$175 psf (on a net effective basis).

With most Grade A office space on Hong Kong Island fully occupied or at relatively high rents, growing numbers of tenants are also considering Kowloon Bay and Kwun Tong as relocation options, due to the high specification of recent projects such as Landmark East at competitive rates. However, with the considerable supply brought about by the 2 million sf (net) of office space in Kowloon East during the second half of the year, rentals in decentralized districts are likely to encounter a certain extent of downward pressure.

“Looking forward, we expect to see continued demand for office space on Hong Kong Island during the second half of 2008. Given the lack of new supply in the foreseeable
future and record low vacancies, we believe that the rental market in the CBD will remain robust to register y-o-y increase of at least 20% for 2008,” said Rhodri James, Executive Director of Office Services. “Office rents are not expected to face near-term downward pressure and the major on-going problem for many landlords will be providing sufficient space to accommodate existing and new tenants in their portfolios.”


Retail Market
The retail property market registered overall rental growth of 9.4% in the first half of 2008. Rental in Tsim Sha Tsui, for example, has recorded the strongest growth of 28.1% during the period under review, where average rental is now at $468.6 psf. However, the market began to develop into two different extremes in the past few months. On one hand, shops at top prime retail streets, such as Canton Road, Queen’s Road Central and Russell Street, are almost fully let by shops selling luxury products like jewelry and watches, with cases of retailers having to pre-lease the shop more than six months in advance, and the transacted lump sum monthly rental would be unbelievably high. On the contrary, some shops at secondary retail streets, such as Des Voeux Road Central, Lockhart Road and Hennessy Road, have been vacant for at least a couple of months before they can be leased out, and the landlords are willing to accept a more reasonable rent offered by potential retailers.

“The above phenomenon reflected that major tenants in the current retail market have been dominated by luxury retailers, who probably have benefited from the booming stock and property markets in the past few years. Needless to say, the high streets are the only places that luxury brands will be interested in, but a robust retail market should be as diversify as possible with a view to maximizing the reach to various types of shoppers, which can also be regarded as a means to contain market sensitivity to any sudden economic changes,” according to Joe Lin, Senior Director of Retail Services.

In view of the uncertainty of the general economy, growth of retail sales in the next six months may be limited, and so do the retail property values and rent. Lin expects the retail rent will be able to maintain at the current level, and the overall retail rent will have 5% increase y-o-y by the end of 2008.

Luxury Residential Market
The sustained global financial turmoil has caused some dampening effects to the sentiment in the Hong Kong market. Buyers tend to be more conservative towards
acquisitions of luxury residential properties. However, as availability of quality stock remained limited, property owners are not in any hurry to sell. Given the current
stalemate between buyers and sellers, sales transaction activities began to show signs of plateauing towards mid-2008, despite the fact that both overall capital and rental values sustained a substantial growth of 32.2% and 13.8%, respectively.

Although borrowing costs are steadily rising with the recent adjustments in mortgage rates by various banks, the interest rates indeed remain at a relatively low level that such upward adjustment should not have any material impact to the luxury residential sector, as long as the increment is moderate. The record-breaking transaction of a house at Severn 8 on the Peak at a unit rate of about HK$57,000 psf highlighted that trophy property is still highly sought after by fiscally sound investors.

Meanwhile, the ongoing relocation of senior executives of financial institutions to Hong Kong, coupled with the sustained limited supply of leasing stock in the market, will continue to provide solid support to the rental value of luxury residential premises. Alan Man, Senior Director of CBRE Residential said, “We remain optimistic on the luxury residential leasing market and expect its value to appreciate by 15-20% y-o-y for 2008 whilst earlier forecast on capital value should remain largely unchanged at 20-25% y-o-y by the end of the year.”

Outlook – Every Cloud Has a Silver Lining
No doubt that the local market has been turning increasingly cautious in the first half of 2008. The persistent sub-prime crisis has already deepened the financial stability of most economies that has urged many investors to adopt a “wait-and-see” attitude. “The patchy situation worsened as a result of inflation led by soaring energy and food prices as well as high possibility of further interest rate increase. In Hong Kong, the local stock market also experienced further downward adjustment which has inevitably affected investment sentiment,” said Yu Kam-hung, Senior Managing Director, Hong Kong, Southern China and Taiwan. “In light of these, we expect that the overall property market will remain flat but consistent local demand for quality assets as hedge against the surging inflation will make the market resilient over the next six months.”Notwithstanding the lull, the solid economic foundation in Hong Kong and favourable
outlook of China’s economic situation will continue to attract overseas capital to the local market. “The influx of foreign institutional investors and local private investors for the finite supply of premium quality assets will lead to brisk activity in the market and support prices. As long as the global financial, investment, trade and business worlds remain interested in China and the region, Hong Kong's superb infrastructure, financial, accounting and legal systems will continue to position the city as the best place for overseas companies to set up regional headquarters. It is also relatively inexpensive these days to set up in Hong Kong compared to other cities in the region, particularly when our currency is pegged with the weakened US dollar,” commented Mr. Yu.

About CB Richard Ellis
CB Richard Ellis Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services firm (in terms of 2007 revenue). With over 29,000 employees, the Company serves real estate owners, investors and occupiers through more than 300 offices worldwide (excluding affiliate offices). CB Richard Ellis offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. CB Richard Ellis is the only commercial real estate services company named one of the 50 “best in class” companies by BusinessWeek, and was also named one of the 100 fastest growing companies by Fortune. Please visit our web site at www.cbre.com.