BMI View: The office sector continues to offer the most promise regarding rentals, as Grade A establishments remain in high demand and lack of available space is pushing upward trend. Industrial real estate also represents a potential area for investment as the limited space, good demand and inauguration of national 'reindustrialisation' looks to offer opportunities in the mid-term. We opine that Retail will witness further contractions and advise vigilance when considering this market over the same period.
We have revised our economic forecast for growth in Hong Kong with real GDP to remain steady at 2.5% over 2016, no change from 2015, as the regional pressures, predominantly stemming from fiscal reforms and corrections in China, Hong Kong's largest trade partner, weigh-in on demand into the Asian Tiger economy. A main culprit that has subdued interest is the strong national currency. The HKD is tied to the US dollar, the recent rally in the greenback has seen Hong Kong exports become less competitive and the city viewed as a more expensive destination for travel and commerce. However, promising underlying macro-economic factors, such as rising private consumption, and the fact that foreign companies are interested in Hong Kong's semi-autonomous market due to its transparency and strong legal accountability, will keep demand particularly strong in areas such as tertiary services. We therefore opine real GDP to grow 1.1% to 3.6% by 2017. All three real estate sub-sectors that we cover are likely to benefit from the improving economic situation, and see activity rise across the medium term.
The office sector is benefitting from high demand for Grade A space from financial services, owing to the surging stock market in the first half of the year. This is expected to put upward pressure on rentals in popular investment locations, in particular the central business district (CBD) especially considering vacancies in the CBD sit at 1%. This should see rentals continue an upward trend, as the market is bullish and actively sought out by international players. Limited supply is anticipated to blight secondary markets, which we expect to result in a downward rental trend that will perpetuate across sub-district markets through 2016.
Retail continues to feel the squeeze from the reduction in Chinese tourism, a core demographic for the industry, owing to the appreciation in the HKD, cross-border tensions and preference for cost-efficient destinations. Effectively, this has influenced the downturn in spending on luxury goods, and has seen a number of luxury retail brands enforce measures as of late, including vacating property in favour of adopting an online presence to avoid sky-high rentals and lowered demand. Although, international retailers presence here should remain solid, given that Hong Kong's reputation as a global retail destination and greater levels of private consumption will support the furtherance of such establishments. Rising incomes regionally and higher spending figures bode well for the retail real estate in the mid-term, as we believe the strong economic fundamentals will positively impact demand for space in malls and department stores, where the larger proportion of retail demand is likely to be focused. We therefore expect to see retail rentals rise post-2016 once the market has cooled and levels of regional tourism increase, but remain stagnant in the short-term as anti-mainland sentiment in Hong Kong persists.
Regarding the industrial sector, there has been minimal transactional activity in recent quarters owing to the heavy ties with the cooling China mainland economy, a prominent trade partner, which has resulted in lower demand for exports due to appreciation in the HKD and depreciation in the Yuan. Subsequently, we have witnessed a drop in developer confidence as a result. But the current supply market is limited, and industry players opine that the market could witness a marginal rise in rentals in the mid-term amid good demand from the rapidly growing e-commerce industry in Asia, driving the nations online retail and effectively increasing demand for warehouse space and logistics parks.
Overall, potential for capital gains rests mainly in the office sub-sector, as rentals are expected to continue an upward trend owing to good demand and a lack of grade A space in the market. New supply will emerge in both office and industrial with a few projects reaching the market early-2016, although good demand and strong economic fundamentals should sustain rental trends in both sectors. We opine that retail will continue to contract owing to the Occupy Central movement, slowdown in sales and lower consumption, which may result in more vacancies over 2016 and see rentals drop further.
The Hong Kong Real Estate Report features BMI Research's market assessment and independent forecasts of major construction projects in the residential and commercial markets, plus rental prices and yields in major cities. The report critically analyses the prospects for real estate within the broader economic and financial context - both domestic and global - via our econometrically-modelled and clearly explained banking and economic forecasts and follows this through to evaluate the implications for REITs.
BMI's Hong Kong Real Estate Report provides industry professionals and strategists, sector analysts, business investors, trade associations and regulatory bodies with independent forecasts and competitive intelligence on the real estate industry in Hong Kong.
- Benchmark BMI's independent real estate industry forecasts for Hong Kong to test other views - a key input for successful budgeting and strategic business planning in the Hong Kong real estate market.
- Target business opportunities and risks in Hong Kong through our reviews of latest industry trends, regulatory changes and major deals, projects and investments.
- Assess the activities, strategy and market position of your competitors, partners and clients via our company profiles (inc. SWOTs, KPIs and latest activity).
BMI Industry View
Summary of BMI’s key industry forecasts, views and trend analysis covering real estate and construction, regulatory changes, major investments and projects and significant national and multinational company developments.
Industry SWOT Analysis
Analysis of the major Strengths, Weaknesses, Opportunities and Threats within the real estate sector and within the broader political, financial, economic and business environment.
Industry Forecasts Outlook
Historic data series (2010-2013) and forecasts to end-2019 for the domestic real estate industry and for the local and global finance industry.
- Real Estate: Office, retail and industrial real estate yields for all major cities (%); short term forecasts on minimum and maximum real estate rental prices by sub-sector (USD per square metre and local currency per square metre).
- Construction: Industry value (USDbn); contribution to GDP (%); employment (‘000); real growth (%).
- economy: Economic growth (%); nominal GDP (USDbn); unemployment (%); interest rates (%); exchange rate (against USD).
BMI’s Real Estate Risk Reward Index
BMI’s Risk Reward Indices provide investors (real estate vendors, construction companies and financial investors) looking for opportunities in the region with a clear country comparative assessment of a market’s risks and potential rewards. Each of the country markets are scored using a sophisticated model that includes more than 40 industry, economic and demographic data points to provide an indices of highest to lowest appeal to investors, with each position explained.
Overview of the real estate sector, including analysis of existing/planned real estate developments and emerging industry trends in the office, industrial and commercial sectors
Features detailed city-level data and analysis on rental prices, yields, contract terms and real estate availability with separate chapters covering the office, retail and industrial sub-sectors.
Examines the competitive positioning and short- to medium-term business strategies of key industry players. Strategy is examined within the context of BMI’s industry forecasts, our macroeconomic views and our understanding of the wider competitive landscape to generate Company SWOT analyses. The latest financial and operating statistics and key company developments are also incorporated within the company profiles, enabling a full evaluation of recent company performance and future growth prospects.
*Company profiles are not available for every country. Those reports instead contain information on the current activities of prominent companies operating in the market.