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Favourable policy initiatives to sustain growth in the Office, Retail, Industrial and Residential sectors in coming years
HONG KONG, 28 January 2016 – Mainland China's influence continues to grow across the four core sectors of the Hong Kong property market, according to the latest research "Past, present, future: China's role in driving the growth of Hong Kong's property market" released by property consultant JLL today. Demand for office space is increasingly being underpinned by mainland corporates, while a persistent slowdown in inbound tourism from China has put a large dent in retail sales growth of late. Cross-border trade remains the lynchpin of the city's warehouse sector, while mainland participation in the residential market is slowly transitioning from a buyer to that of a developer.
New mainland policy initiatives, including the development of the offshore renminbi market, the expansion of CEPA and the roll-out of the Stock-Connect Pilot Programme, have played a leading role in driving demand for Hong Kong office space. In 2015, mainland Chinese firms were among the most active in the market, accounting for about 36% of all new leasing transactions in Central. Their share of new lettings in the Grade A office market has doubled over the past five years and today accounts for about 21% of all floor space leased in Central.
Denis Ma, Head of Research at JLL, said: "With China's economy starting to slow and its financial markets showing increased volatility, there is growing concern whether demand from the mainland will be sustained. But looking ahead we remain confident that mainland companies will continue to play a pivotal role in the short- and long-term growth of the city's office market. Government policies will play a large part in growth and help to attract more foreign companies to establish or grow operations in Hong Kong. We estimate that up to 28% or 7 million sq ft of the tenant base in the Central Grade A office market will be mainland corporates by 2021."
Hong Kong's retail sector flourished at the same time mainland tourist arrivals increased three-fold between 2006 and 2015, accounting for more than three quarters of all tourist arrivals last year. Latest figures show mainland tourists spent an estimated HKD 178 billion on shopping in Hong Kong last year, accounting for about a third of all retail sales and spending an average of HKD 3,900 per visit. Despite the growth of mainland arrivals slowing since their peak in 2014, some of the causes that have led to a retail sales slump of late can be reversed through policy changes.
"If the restrictions placed on multi-entry visas were eased and the Individual Visit Scheme (IVS) programme was expanded as proposed in 2012, up to HKD 21 billion in sales could be added to Hong Kong's retail market. But the type of tourists would likely be more focused on mass market goods rather than luxury items," said
Since China's economy has slowed, Hong Kong's logistics market has shown signs of vulnerability. In 2015, trade with China retreated for the first time since the Global Financial Crisis, dropping 1% y-o-y through the first 11 months. With external trade accounting for about 70% of all warehousing demand in the city, the slowdown has led to an easing of new warehousing demand.
But as Pearl River Delta (PRD) industries move up the value chain, they have increasingly turned to Hong Kong's logistics market to move their goods, taking advantage of the higher quality provisions and security offered by warehouse in the city. Other positives for the sector include the completion of new infrastructure that will bring the Western PRD within a 3-hour commute of Hong Kong and permit cargo flowing from the Western PRD to be moved through export facilities at Hong Kong International Airport (HKIA) and the Kwai Chung Container Port. We believe the trade with the PRD is likely to account for a greater portion of Hong Kong's total trade with mainland China.
Ma said: "According to HKIA Master Plan 2030, cargo handled by HKIA will increase at an average of 4.2% per year, with the bulk of growth being driven by the movement of goods in and out of mainland China. Based on our estimates, the increase in cargo volumes at HKIA translates to about 300,000 sq ft of additional warehousing demand per year. Hong Kong's status as a key logistics and trading hub will further be cemented by the 'One Belt, One Road' policy initiative, while the demand for warehouse will increase."
Mainland homebuyers had accounted for as much as 40% of all sales in individual projects in the primary market before retreating to 10% in 2015, largely as a result of the government's stiff Buyer's Stamp Duty introduced in 2012. Today, attention has shifted to the growing participation of mainland developers. Mainland developers have bid on over half of all residential land sales tendered by the government in 2015, winning about a quarter of awarded tenders and elbowing aside local developers that had long enjoyed an entrenched position.
They are also setting new benchmarks for the market. The bid prices of mainland developers exceeded market expectations in 73 out of 100 instances between 2013 and 2015, compared with 59 out of 100 for local developers.
Ma said: "We expect mainland developers will continue to expand in the city. Hong Kong's traditional developers are still expected to dominate the market but will face increasing competition in acquiring residential plots from a larger pool of bidders. Based on JLL's supply forecasts, residential units built by mainland developers will account for up to 8% of the overall private housing supply between 2016 and 2019, with the majority delivered in the New Territories (56%) and Kowloon (35%). With around 119,000 new households expected to be formed between 2016 and 2019, about one in ten new families opting for primary homes in the private market could end up living in properties developed by mainland developers. Whether mainland developers are able to grow their business in the city to a point where they can influence market direction remains to be seen and will be dependent on the response to the first wave of their units that come to the market."
(Left to right) Kenny Yu, local director of Hong Kong Markets; Terence Chan, Head of Retail; Denis Ma, Head of Research; Henry Mok
Denis Ma, Head of Research at JLL.