150714 insights value in hong kong developers

8/19/2019 150714 Insights Value in Hong Kong Developers

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14 July 2015DBS Group Research . Equity

www.dbsvickers.com

ed-JS & TH/ sa- AH & MH

Hong Kong – great place to make

money, not spend

• Stable residential prices on solid local demand

•

Central to lead the pack in the office market upturn;

the worst for retail scene is yet to be seen

• Developers are attractively valued; prefer office

landlords to retail counterparts

• Top picks: Cheung Kong Property, SHKP and

Hongkong Land

Market view. Local homebuyers are supporting theresidential market where prices have reached new highs.

Despite our expectations of stable prices, potential interest

rate hikes and local economic slowdown could push up the

real interest rate and exert the pressure on home prices. The

office market is exhibiting improving rental growth

momentum, especially Central, thanks to rising demand

from Mainland Chinese firms. On the back of tight vacancy

and limited new supply, Central should continue to lead thepack. The challenging retail scene is expected to persist

given worsening inbound tourism led by the strong local

currency.

Stock recommendation. Developers are attractively valuedwith new project launches as a key sector catalyst. Our top

picks are Cheung Kong Property and SHKP for their

compelling valuations and strong execution. Potential index

inclusion should further add to the former’s investment

appeal. Other preferred developers include Sino Land and

New World. Among landlords, we prefer office plays -

Hongkong Land and Swire Properties. Yield movement will

determine the performance of the REIT sector.

HSI: 23,517

ANALYST

Jeff YAU CFA, +852 2820 4912 [email protected]

Allen CHAN +852 2971 [email protected]

Recommendation and valuation

Code Price Mkt 12-m Recom

8- J ul Cap target

HK HK bn HK

Property Developers

Cheung Kong Property 1113 HK 57.95 224 81.10 Buy

Hang Lung Props 101 HK 20.55 92 25.05 Buy

Henderson Land 12 HK 49.00 162 55.25 Buy

K Wah Int'l 173 HK 3.80 11 5.47 Buy

Kerry Props 683 HK 27.20 39 34.00 Buy

Lai Sun Dev 488 HK 0.150 3 0.263 Buy

MTR Corp 66 HK 34.05 199 36.20 Hold

New World Dev 17 HK 8.83 79 11.74 Buy

Sino Land 83 HK 11.68 71 15.14 Buy

SHKP 16 HK 115.10 331 150.00 Buy

Tai Cheung 88 HK 6.59 4 8.65 Buy

Wheelock & Co. 20 HK 37.55 76 42.35 BuyWing Tai Props 369 HK 4.61 6 6.05 Buy

Property Inv estors

Great Eagle 41 HK 27.65 18 30.50 Hold

HK Land @ HKL SP 7.70 18 9.32 Buy

Hysan Dev 14 HK 31.90 34 38.15 Buy

Swire Props 1972 HK 23.35 137 30.20 Buy

Wharf 4 HK 49.20 149 53.85 Hold

REITs

Champion REIT 2778 HK 4.03 23 4.68 Buy

Fortune REIT 778 HK 7.48 14 9.15 Buy

Prosperity REIT 808 HK 2.67 4 3.00 Buy

Sunlight REIT 435 HK 3.71 6 4.22 Buy

The Link REIT 823 HK 45.10 103 49.10 Buy@ denominated in USD

Source: Thomson Reuters, DBS Vickers

China / Hong Kong Industry Focus

HK Property SectorRefer to important disclosures at the end of this report


2/104

Note: Prices used as of 8 July 2015

Covered photo (from left):Hemera (CK Property & Nan Fung);Harbour City (Wharf Holdings);Citibank Plaza (Champion REIT)

Analyst

Hong Kong Property

Jeff Yau, CFA (852) 2820 4912 [email protected]

Allen Chan (852) 2971 [email protected]

Table of Contents

Investment summary 3

Residential 4

Office 13

Retail 20

Property developers 26

Property Investors 39

REITs 44

Appendix: Asset breakdown 49

Appendix: NAV sensitivities 51

Stock Profiles 54

Cheung Kong Property (1113 HK) 54

Hang Lung Properties (101 HK) 56

Henderson Land (12 HK) 58

K. Wah International (173 HK) 60

Kerry Properties (683 HK) 62

Lai Sun Development (488 HK) 64

MTR Corporation (66 HK) 66

New World Development (17 HK) 68

Sino Land (83 HK) 70

Sun Hung Kai Properties (16 HK) 72

Tai Cheung (88 HK) 74

Wheelock & Co (20 HK) 76

Wing Tai Properties (369 HK) 78

Great Eagle (41 HK) 80

Hongkong Land (HKL SP) 82

Hysan Development (14 HK) 84

Swire Properties (1972 HK) 86

Wharf Holdings (4 HK) 88

Champion REIT (2778 HK) 90

Fortune REIT (778 HK) 92

Prosperity REIT (808 HK) 94

Sunlight REIT (435 HK) 96

The Link REIT (823 HK) 98


3/104

China / Hong Kong Industry FocusHK Property Sector

Page 3

Investment summary

Residential

Despite tighter mortgage lending rules for mass-market

projects introduced by the Hong Kong Monetary Authority in

late Feb, residential prices remain on an uptrend to hit a new

high, supported by solid housing demand from local end-

users/first-time buyers. There was a revival of primary market

activities in late Mar after a short-lived consolidation phase.

Developers’ close-to-market pricing strategy stimulated buying

interest. The secondary market, however, remained relatively

quiet. Barring any external shocks that may trigger forced

selling among existing home owners, residential prices should

remain stable in the coming twelve months. Any interest rate

hikes would make housing less affordable but household

income growth could partially neutralise the impact. If localeconomic growth loses momentum with deflationary pressure

emerging, real interest rates would turn positive and dent

residential demand. This remains the key risk for the residential

sector in our view.

Office

Office leasing market growth, particularly in Central, has been

gaining momentum, especially from 2Q15. Supported by

growing office demand from Mainland Chinese corporates,

vacancy in Central has hit a six-year low. New financial

liberalisation measures between Hong Kong and China such as

mutual fund recognition scheme and the upcoming Shenzhen-Hong Kong Stock Connect should augur well for office

demand, especially in CBD, over the medium term. Coupled

with tight new supply, we are positive on Central office market.

We forecast Central office rents to lead the pack and rise 10-

12% in 2015. Rental growth for decentralised offices should

be modest at 5% except for strata-titled units in Kowloon East

where market competition has been increasing.

Retail

The retail scene is challenging with the worst yet to come.

Retail sales have been falling, primarily led by slowing inbound

tourism. The strong local currency is encouraging tourists to

spend overseas instead of in Hong Kong. Sales of expensive

luxury goods have been consistently falling, while sales of

medicine and cosmetic items have stopped rising. By the same

token, outbound tourism in Hong Kong is growing remarkably

which is dragging local consumption. Multiple entry

arrangements for Shenzhen residents have tightened since Apr

15, and this would reduce Mainland Chinese tourist arrivals.

Street shops near the border with retail offerings tailor-made

for grey goods traders/day trippers should be hit the most.

Overall, we project that retail sales value will decline 2-4% in

2015. Rents for high-street shops should fall 10-20% in 2015

while those for shopping centres with diversified retail offering

should rise 0-3%.

Property Developers

Property developers we cover are trading at 14-82% discounts

to our assessed current NAVs, with an average for the sector at

36%, which still compares favourably its 10-year average of

21%. Sector valuation is attractive with new project launches

as catalyst to narrow the NAV discounts. Within the sector, our

top picks are Cheung Kong Property and SHKP for their

appealing valuations, encouraging project sales performanceand solid recurrent income. Potential index inclusion could

further add to Cheung Kong Property’s investment appeal.

Other preferred developers include Sino Land and New World

Development. Among small-to-mid cap developers, Tai

Cheung is unlocking its NAV through strata-titled disposal of

Metropole Square and has the potential to be re-rated.

Property Investors

Property investors are trading at 38% discount to our

appraised current NAVs on a weighted average basis, against

its 10-year average of 27%. Within the sector, we prefer office

landlords - Hongkong Land and Swire Properties - given ourpositive stance on the office market. Even after a strong share

price rally YTD, Hongkong Land should have scope for further

share price appreciation. Swire Properties remains attractively

valued. Low valuations for Hysan Development could lend

support to its share price. The challenging retail scene may

increase uncertainty on Wharf’s earnings and hence we rate

the counter as a HOLD. However, parent Wheelock has been

raising its stake in Wharf which could limit further downside

risk on stock price.

REITs

REITs under our coverage are trading at prospective distributionyields of 4.4-6.4% or 4.7% on a weighted average basis.

However, the yield of Hong Kong 10-year Exchange Fund Note

has recovered to 1.8% amid growing expectations of US Fed

rate hike, and the current yield spread currently stands at 2.9%,

in line with its historical average of 2.9%. Yield movement

should determine the near-term performance of the REIT sector.


4/104


Page 4

Residential

Tighter mortgage lending rules for mass market projects. In

late Feb15, the Hong Kong Monetary Authority furthertightened mortgage lending rules in response to continued

spiralling home prices and rising indebtedness of Hong

Kong households to a historical high of >64% of GDP. The

maximum loan-to-value (LTV) ratio for self-use residential

properties valued at HK$7m or below was lowered to 60%

from 60-70%. These properties are usually mass market

projects targeting mainly local end-users/first-time buyers

which were not affected by cooling measures introduced by

the government in earlier years. In addition, the maximum

debt servicing ratio (DSR) for mortgage applicants seeking

additional financing for these units which led to LTV ratio

rising to >80%, was lowered to 45% from 50% withstressed-DSR cap lowered to 55% from 60%. The more

stringent mortgage lending rules inevitably made it more

difficult for prospective buyers to meet the down-payment

requirement.

Difficult to meet the down-payment requirement. Since the

recovery from the global financial crisis in 2009, home prices

have been rising consistently. With the appreciation in home

prices outstripping household income growth, the ratio of

home prices to median household annual income surged to

15x, which is almost the highest seen in the past twenty

years. Based on LTV ratio of 60%, the down-payment

required to purchase a home would represent c.6 years ofhousehold income. However, the housing affordability ratio,

which measures the percentage of monthly household

income used to service mortgage repayments remain far

below the levels seen in 1997, thanks to the favourable

interest rate environment. To sum it up, we see that

meeting the down-payment requirement, rather than the

ability to service monthly mortgage repayments, is a major

challenge for potential homebuyers.

Ratio of housing price to household income (privatehousehold)

4

6

8

10

12

14

16

18

20

M a

r - 9 4

M a

r - 9 5

M a

r - 9 6

M a

r - 9 7

M a

r - 9 8

M a

r - 9 9

M a

r - 0 0

M a

r - 0 1

M a

r - 0 2

M a

r - 0 3

M a

r - 0 4

M a

r - 0 5

M a

r - 0 6

M a

r - 0 7

M a

r - 0 8

M a

r - 0 9

M a

r - 1 0

M a

r - 1 1

M a

r - 1 2

M a

r - 1 3

M a

r - 1 4

M a

r - 1 5

x

Source: Centaline Property Agency, Census and Statistics Department,DBS Vickers

Housing affordability ratio

0%

20%

40%

60%

80%

100%

120%

J a n - 9 4

J a n - 9 5

J a n - 9 6

J a n - 9 7

J a n - 9 8

J a n - 9 9

J a n - 0 0

J a n - 0 1

J a n - 0 2

J a n - 0 3

J a n - 0 4

J a n - 0 5

J a n - 0 6

J a n - 0 7

J a n - 0 8

J a n - 0 9

J a n - 1 0

J a n - 1 1

J a n - 1 2

J a n - 1 3

J a n - 1 4

J a n - 1 5

Prime base HIBOR base

Prime base HIBOR base

Jun-15

May-15 54.3%

55.1%

53.2%

54.1%

Source: Centaline Property Agency

Primary market picked up quickly. The stricter down-

payment requirement should inevitably drive marginal

homebuyers out of the market. And, prospective

homebuyers had adopted a "wait and see" approach for a

short period of time after the new rule took effect. But the

market lull was short-lived. The primary market staged a

revival in late Mar when new projects such as Hemera drew

strong buying interest with close-to-market pricing. This

reflects that underlying residential demand remains solid.

Rising marriage and divorce rates lead to higher demand for

accommodation. In recent years, number of marriages in

Hong Kong has been on an uptrend, and contributed to

solid housing demand. On the other hand, divorce rates arealso rising, and may explain why small-sized units are

becoming more popular than before.


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Page 5

Number of Registered Marriage in Hong Kong

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

Person

Source: CEIC

Number of Divorce Decrees Granted in Hong Kong

0

5,000

10,000

15,000

20,000

25,000

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

Person

Source: CEIC

Parental support. Nowadays, it is increasingly common for

parents to help bridge the funding gap for down-payment

when their children purchase homes. This would in turn

support local housing demand.

Overall, transaction volume in the primary market rose 25%

to c.8,500 units in 1H15, and transaction value totalled

HK$90bn, representing 43% y-o-y growth.

Yearly primary market transactions – volume

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

1H 2HNo. of units


Yearly primary market transactions – value

0

20,000

40,00060,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

1H 2HHK$m


Monthly primary market transactions – volume

0

500

1,000

1,500

2,000

2,500

3,000

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A r - 1 2

J u l - 1 2

O c t - 1 2

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

J a n - 1 4

A p r - 1 4

J u l - 1 4

O c t - 1 4

J a n - 1 5

A p r - 1 5

No of unitsJun 5

-15.5% m-o-m11.2% y-o-y

6M 5

24.5% y-o-y



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Page 6

Mass market projects continued to sell well in 1H15, despite

tighter mortgage lending rule squeezing some marginal

buyers out of the market. Tseung Kwan O was the focus of

the primary market, with four projects launched for sale

after the tighter mortgage lending rules for mass market

projects took effect. In early Apr, K.Wah International

launched Twin Peaks in Tseung Kwan O with >360 units (or

97% of total) sold for c.HK$2.9bn or HK$12,500psf. CK

Property tapped the strong demand with the launch of

Hemera and The Beaumount II. Market response was

overwhelming and both projects were completely sold

within a short period of time. Thereafter, Sino Land also sold

c.515 units at Corinthia by the Sea, a jv with K.Wah,

generating revenue of c.HK$5bn. Overall, c.3,400 new units

in Tseung Kwan O were sold for c.HK$26bn, with sell-

through rate of 99%.

CK Property was the best-selling developer in 1H15,generating c.HK$21bn revenue from property sales, with

the bulk from Hemera and The Beaumount II in Tseung

Kwan O. La Lumiere in Hung Hom, launched in late Feb, has

been substantially taken up since its initial launch in late Feb.

In our view, reasonable pricing is the key to a successful

launch.

SHKP’s launch of Century Link in Tung Chung in Jan waswell received, with 97% of total units sold. The launches of

Wharf’s Peninsula East in Yau Tong and China Overseas

Land’s My Place in To Kwa Wan were also greeted with

enthusiastic response. These two mass market projects were

fully snapped up given attractive offer prices.

Sentiment in the luxury home market also seemed to be

improving. SHKP sold eight luxurious houses at 50 Stanley

Village Road on Island South and three at Twelve Peaks on

the Peak for c.HK$2.4bn in total. Henderson Land sold 9

units at 39 Conduit Road for c.HK$1.3bn or HK$48,800psf

on average on saleable area basis. Elsewhere, Sino Land sold

five houses at Botanica Bay in Cheung Sha on Lantau Island

at an ASP of c.HK$23,000psf.

New project launches since Jan 2015

Launch Projec t Locat ion Dev eloper T ot al Un it s Unit s so ld % sold A SP (HK psf )

J an-15 Century Link Ph 1 Tung Chung SHKP 1,407 1,370 97% 10,000

Jan-15 The Nova Sai Ying Pun COLI/URA 255 118 46% 19,900

Feb-15 J ones Hive Tai Hang Henderson Land/Soundwill 119 54 45% 21,400

Feb-15 One Kowloon Peak Ph 1 Tsuen Wan Cheuk Nang 49 13 27% 11,800

Mar-15 La Lumiere Hung Hom Cheung Kong Property 216 214 99% 16,000

Apr-15 Twin Peaks Tsueng Kwan O K.Wah 374 361 97% 12,500

Apr-15 Hemera Tseung Kwan O Cheung Kong Property 1,648 1,648 100% 9,000Apr-15 50 Stanley V illage Road Island South SHKP 12 8 67% 48,050

Apr-15 Peninsula East Yau Tong Wharf 256 256 100% 10,100

Apr-15 2 Cape Drive Island South COLI 7 2 29% 68,300

Apr-15 Botanica Bay Cheung Sha Sino Land 16 5 31% 23,000

May-15 My Place To Kwa Wan COLI/URA 168 168 100% 14,500

May-15 High Park Grand Prince Edward Henderson Land 41 2 5% 24,400

May-15 Eden Gate Kowloon Tong Chinacem 38 1 3% 36,000

May-15 Regent Hill Happy V alley Private developer 82 46 56% 23,000

May-15 AXIS Hung Hom Henderson Land 120 42 35% 19,000

May-15 The Beaumount II Tseung Kwan O Cheung Kong Property 872 872 100% 10,000

Jun-15 Domus Yuen Long Paliburg/Regal Hotels 134 134 100% 11,800

Jun-15 Corinthia by the sea Tseung Kwan O Sino Land/K.Wah 536 515 96% 14,300

Jun-15 Ultima Ph 1 Ho Man Tin SHKP 256 76 30% 32,000Jun-15 V IVA Ma Tau Wai Cheung Kong Property 75 61 81% 16,000

Jul-15 Skypark Mong Kok New World/URA 439 40 9% 18,300

Source: Companies, Local press, DBS Vickers

Thanks to the buoyant primary market, we estimate that

there c. 13,200 new units scheduled for completion in

2015-16 have been pre-sold. This represents 43% of the

total projected supply during these two years.

Secondary market however appeared less buoyant. Unlike

developers, existing homeowners are unable to provide

price incentives or top-up mortgage loans to lure

homebuyers. But they have strong holding power due to the

prevailing low interest rates. This resulted in a relatively

quiet secondary market. During Mar-Jun 15, transaction

volume in the secondary market averaged c.3,300units per

month, well below the 20-year average of 5,400 units.


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Page 7

Monthly secondary market transactions

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A p r - 1 2

J u l - 1 2

O c t - 1 2

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

J a n - 1 4

A p r - 1 4

J u l - 1 4

O c t - 1 4

J a n - 1 5

A p r - 1 5

No of unitsJun 5

25.9% m-o-m

-7.4% y-o-y

6M 5

19.6% y-o-y


Residential prices remain on upward trajectory. Home price

growth has not derailed even with the implementation of

stricter mortgage lending rules. According to Centa-City

Leading Index, residential prices rose by a further c.4% after

the HKMA tightened the mortgage lending policy.YTD,

overall home prices grew c.8%, with mass market projects

registering slightly higher growth of c.9%. During the same

period, prices for small-to-medium sized units grew c.9%,

outperforming those for large-sized units by c.4%.

Centa-City Leading Index (overall)

45

65

85

105

125

145

165

J a n 0 7

J u l 0 7

J a n 0 8

J u l 0 8

J a n 0 9

J u l 0 9

J a n 1 0

J u l 1 0

J a n 1 1

J u l 1 1

J a n 1 2

J u l 1 2

J a n 1 3

J u l 1 3

J a n 1 4

J u l 1 4

J a n 1 5

Home price growth

YTD 2015: +8%2014: +11%2013: +3%2012: +21%2011: +8%2010: +19%2009: +30%2008: -15%


Centa-City Leading Index (mass)

40

60

80

100

120

140

160

J a n 0 7

J u l 0 7

J a n 0 8

J u l 0 8

J a n 0 9

J u l 0 9

J a n 1 0

J u l 1 0

J a n 1 1

J u l 1 1

J a n 1 2

J u l 1 2

J a n 1 3

J u l 1 3

J a n 1 4

J u l 1 4

J a n 1 5

Home price growthYTD 2015: +9%2014: +14%

2013: +3%2012: +24%2011: +8%2010: +19%2009: +31%2008: -16%2007: +22%


Centa-City Leading Index (small/medium-sized units)

40

60

80

100

120

140

160

J a n 0 7

J u l 0 7

J a n 0 8

J u l 0 8

J a n 0 9

J u l 0 9

J a n 1 0

J u l 1 0

J a n 1 1

J u l 1 1

J a n 1 2

J u l 1 2

J a n 1 3

J u l 1 3

J a n 1 4

J u l 1 4

J a n 1 5

Home price growthYTD 2015: +9%2014: +12%2013: +3%2012: +24%2011: +7%2010: +19%2009: +31%2008: -16%2007: +24%


Centa-City Leading Index (large-sized units)

60

70

80

90

100

110

120

130

140

150

J

a n 0 7

J u l 0 7

J

a n 0 8

J u l 0 8

J

a n 0 9

J u l 0 9

J

a n 1 0

J u l 1 0

J

a n 1 1

J u l 1 1

J

a n 1 2

J u l 1 2

J

a n 1 3

J u l 1 3

J

a n 1 4

J u l 1 4

J

a n 1 5

Home price growth

YTD 2015: +5%2014: +6%2013: +1%2012: +14%2011: +5%2010: +21%2009: +27%2008: -16%2007: +27%



8/104


Page 8

Yuen Long projects to take centre stage. SHKP's project

launches in 2H15 are skewed towards the mass market

segment. The company has obtained pre-sale consent for

Century Link Ph 2 in Tung Chung. Other projects scheduled

for sale include Twin Regency, Grand YOHO Development

and Accapella Ph 1 in Yuen Long.

CK Property plans to launch two upmarket projects in

Kowloon - Stars by the Harbour in Hung Hom and The

Zumurud in Ho Man Tin - for pre-sale in 2H15. These two

developments consist of mostly large-sized units targeting

affluent upgraders. Besides, the company is applying for

pre-sale consent for two projects in Yuen Long, including a

house project and a large-scale development near Long Ping

Station.

New World Development has a strong project launch

pipeline in 2H15. After Skypark in Mongkok, the company

plans to sell The Parkhill in Yuen Long next followed by The

Clearwater Bay in Sai Kung towards the end of the year. We

note that The Clearwater Bay will be the largest residential

project in the area in more than a decade.

Double Cove Ph 4 in Ma On Shan will be Henderson Land's

major project for sale in 2H15. The recent encouraging

tender results for nearby sites should facilitate the launch of

this project. The company will launch its urban

redevelopment projects in Sai Wan Ho and Tai Kok Tsui at

appropriate times.

After Corinthia by the Sea in Tseung Wan O is substantially

sold, Sino Land plans to launch The Fairmont in Mid-levels

subject to obtaining pre-sale consent. This upmarket projectcontains twenty-seven large-sized units with panoramic

harbour views.

Kerry Properties’ planned launch of 1,100-unit Tuen Mun

project will be in the spotlight in 2H15. One of its attraction

lies with its close proximity to the renowned Harrow

International School.

Wharf will focus on selling its Mount Nicholson project on

the Peak, a 50/50 JV with unlisted Nan Fung. The 19 villas

will be offered for sale first, followed by the apartments.

The distinguished address would make this luxury

development well sought after by wealthy buyers. Parent

Wheelock & Co will launch a redevelopment project in Shau

Kei Wan, followed by a project in Tseung Kwan O.

Overall, the projects in Yuen Long are anticipated to take

centre stage in the primary market in 2H15. Property

developers are expected to maintain their close-to-market

pricing strategy to push sales, which may cap upside on

home prices. Overall, we expect c.17,000 primary units to

be sold in 2015.


9/104


Page 9

Expected major project launches in 2H15 and 2016

Pro jec t / L o t n o L o c at io n L o c at io n St ak e

(% )

T o t a l n o .

o f u n i t s

Remark

Cheung K ong P rope r t y

Stars by the Harbour Kln Hung Hom 100 321 Presale consent obtained in F eb 15

The Zumurud Kln Kow loon City 80 228 Presale consent pending approv alLot 2129 in DD121 NT Yuen Long 100 41 Presale consent pending approv al

YLTL 518 NT Yuen Long 100 1,129 Presale consent pending approv al

S H K P

Ultima Ph 1 Kln Ho Man T in 100 256 On sale

Century Link Ph 2 NT Tuen Mun 100 932 Presale consent obtained in Apr 15

Grand YOHO Dev elopment Ph 1 NT Yuen Long 100 1,114 Presale consent pending approv al

A cappella Dev elopment Ph 1A NT Yuen Long 100 499 Presale consent pending approv al

A cappella Dev elopment Ph 1B NT Yuen Long 100 362 Presale consent pending approv al

A cappella Dev elopment Ph 1C NT Yuen Long 100 166 Presale consent pending approv al

Tw in Regency NT Yuen Long 100 523 Presale consent pending approv al

S ino L and

The F airmont HK Mid-Lev els 100 27 Presale consent pending approv al

YLTL 513 NT Yuen Long 40 912 J V w ith K. Wah

New W or ld Dev e lopment

Skypark Kln Mongkok 100 439 On sale

The Parkhill NT Yuen Long 100 141 Presale consent pending approv al

The Clearwater Bay NT Sai Kung 63 680 Presale consent pending approv al

Des Voeux Road West project HK Western District 80 191 Old lease

Double Cov e Ph 4 NT Ma On Shan 32 474 J V w ith Henderson Land

Double Cov e Ph 5 NT Ma On Shan 32 178 J V w ith Henderson Land

Hende r son L and

Double Cov e Ph 4 NT Ma On Shan 59 474 Presale consent pending approv al

Double Cov e Ph 5 NT Ma On Shan 59 178 J V w ith New World

33 Shing O n Street HK Sai Wan Ho 100 234 Old lease

50-64 Mau Tau Kok Road Kln To Kw a Wan 100 300 Old lease

11-33 Li Tak Street K ln Tai Kok Tsui 100 448 Old lease

K er ry P roper t ie s

KIL 11227 Kln Ho Man T in 100 1,425 Presale consent pending approv al

TMTL 423 NT Tuen Mun 100 1,100 Presale consent pending approv al

Whee loc k

Island Residence HK Shau Kei Wan 100 170 Old lease NT Tseung Kw an O 100 800 Presale consent pending approv al NT Tseung Kw an O 100 428 Presale consent pending approv al

Ch ina Ov e r sea s L and & Inv e s tment

Marina South HK Ap Lei Chau 100 114 Presale consent pending approv al

No. 62 Begonia Road Kln Kow loon Tong 100 10 Presale consent pending approv al

Hong Kong Hous ing Soc i e t y

Hey a Cry stal K ln Cheung Sha Wan 100 350 F or sale soon

Hey a Aqua Kln Cheung Sha Wan 100 275 Presale consent pending approv al

Whar f

Mount Nicholson (Ph 1-3) HK The Peak 50 67 Presale consent obtained in Nov 14

Sw ire P roper t ie s

Lot 724 & 726 in DD332 NT Cheung Sha 100 28 Presale consent obtained in May 15

K. W ah In t e rna t iona l

YLTL 513 NT Yuen Long 60 912 Presale consent pending approv al

Chinachem (un l i s ted)

Inv erness Park Kln Kow loon Tong 100 134 Pre-sale consent obtained in Dec 14

Manha t t an Rea l t y ( un l i s t ed )

1 Tsing Lung Road NT Tuen Mun 100 75 Pre-sale consent obtained in F eb 14

CSI Propert ies

Lai Ping Road 39-77 NT Shatin 100 20 Presale consent obtained in J ul 14

Ry kadan Cap i t a l

The Paseo Kln J ordan 100 66 Presale consent pending approv al

U R A

De Nov o Kln Kai Tak 100 484 Presale consent pending approv al

Hans ion

The Grampian Kln Kow loon Tong 100 14 Presale consent pending approv al

Emperor In te rnat iona l

8 Kw un F at Street NT Tuen Mun 100 14 Presale consent pending approv al

K o w l o o n D e v e l o p me n t

South Coast HK Aberdeen 100 150

Source: Lands Department, Companies, Local press, DBS Vickers


10/104


Page 10

Real interest rates more important in determining home

prices. Potential interest rate hikes will be among the key

aspects to monitor for the residential market. The market is

expecting the US Fed fund rates to rise 25-50bps by end-

2015 and 250 bps by 4Q17. Given that the HK dollar is

pegged to the US dollar, Hong Kong interest rates should

follow suit. Assuming the effective mortgage rate increases

to 4.5% by end-2017 from the current 2%, we estimate

that the housing affordability ratio would deteriorate to

c.69%. This suggests that home prices should fall by c.20%

in order to bring down the affordability ratio to the current

c.55%. But, if household incomes improve by 3% p.a., a

14% correction in home prices is enough to neutralise the

impact of mortgage rate normalisation on housing

affordability. Hence, concerns over interest rate hikes

should not be overplayed. Indeed, from a historical

perspective, home prices in Hong Kong are negatively

correlated with real interest rates rather than nominalinterest rates. The current inflation in Hong Kong remains

higher than the mortgage rate, and hence, the negative real

interest rate is lending support to the housing market. The

retail market in Hong Kong has been slowing down of late,

which may have some repercussions on the overall economy.

If the local economy loses growth momentum with

substantial deflationary pressure as a result, residential

prices could see downward pressure as real interest rates

will surge rapidly, thus dampening local housing demand.

Residential prices vs mortgage rate

0

20

40

60

80

100

120

140

160

0

1

2

3

4

5

6

7

J a n - 0 2

J u l - 0 2

J a n - 0 3

J u l - 0 3

J a n - 0 4

J u l - 0 4

J a n - 0 5

J u l - 0 5

J a n - 0 6

J u l - 0 6

J a n - 0 7

J u l - 0 7

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

Mortgage rate CCL (RHS)

% HK$psf

Source: Cen taline Property Agency, CEIC

Residential prices vs real interest rate

0

20

40

60

80

100

120140

160

(8)

(6)

(4)

(2)

0

2

46

8

J a n - 0 2

J u l - 0 2

J a n - 0 3

J u l - 0 3

J a n - 0 4

J u l - 0 4

J a n - 0 5

J u l - 0 5

J a n - 0 6

J u l - 0 6

J a n - 0 7

J u l - 0 7

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

Rea l inte rest rates (LHS) CCL (RHS)

%

Source: Centaline Property Agency, CEIC

Stable prices. Barring external shocks that may result in

forced selling among existing home owners, residential

prices should remain broadly stable over the next 12 months.


11/104


Page 11

YTD, the government has sold 12 residential and

residential/commercial sites through tender for a total of

HK$18.2bn. We estimate that these sites will provide 4,800

units when completed, with >50% coming from the Tuen

Mun area. YTD, the government sold three lots in Tuen Mun

for HK$8.77bn in total, with c.2,500 units expected to be

built on the sites.

Projects along railways form key supply. YTD, about half of

land supply for development purposes have come from MTRC

tenders. MTRC successfully tendered out Lohas Park Packages

6 & 7 and Tin Wing Stop project to Nan Fung, Wheelock &

SHKP respectively. These three developments are expected to

provide 5,150 residential units when completed in 2021-22.

MTRC will offer one to two more packages at Lohas Park and

Yuen Long Station site (it acts as an agent for the government)

for tender before end-2015.

Elsewhere, Urban Renewal Authority awarded the

development rights for its Fuk Wing Street project, which will

offer 92 units upon completion, to Emperor International. In

total, we estimate that about 10,100 units will be built on

sites sold through tender by the government, MTRC and URA

YTD. This has yet to include redevelopment of ageing

buildings. Judging from the average number of completions

and take-ups during 1996-2014, land supply has normalised.

SHKP continues to be active in the land market with the

acquisitions of three lots YTD. Beside the Tin Wing Stop

development, the company also bought two other

residential or residential/retail sites in Tai Po and Tuen Munrespectively. These three projects will provide residential

GFA of c.2.1m sf and are planned for small-to-medium sized

units. We note that most of the sites SHKP acquired since

2014 will be used to build small-to-medium sized units,

which are more affordable to locals.

SHKP’s land acquisition YTD

Date Locat ion Usage GF A L and Prem

(sf ) (HK m)

F eb-15 Tin Wing Stop Tin Shui Wai R/C 982,280 1,520

Mar-15 TPTL 225 Tai Po R 900,508 3,480

Jun-15 TMTL 539 Tuen Mun R/C 354,566 1,319

Project/ Lot

No

Source: Company, Lands Department

Henderson Land paid HK$3.63bn for a residential lot in

Tuen Mun in Jun 15. This translates into an accommodation

value of HK$4,621psf, 25-59% higher than two lots nearby

sold in 2012 and 2013 respectively, reflecting the rising

price of land in that location. Located close to Harrow

International School, the site is earmarked for low-density

development with total GFA of 0.79m sf. Most of the units

should enjoy seaviews.

More China-based developers joining the game. CITIC

Pacific acquired a residential lot in Ma On Shan through

government tender for HK$1.469bn in May 15, which

exceeded market expectations. This translates into an

accommodation value of HK$6,502psf, 18% higher than

the amount that China City Construction-led consortium

paid for a site nearby and also the highest ever in the area.

This reflects CITIC Pacific’s aggressiveness in raising its land

bank in Hong Kong. This is CITIC Pacific’s first acquisition inHong Kong in 17 years. Upon completion, this residential

project will provide GFA of 225,900sf. The encouraging

tender results should facilitate future launches of Henderson

Land's Double Cove Ph 4 and 5 located in the proximity.

Besides, China Vanke expanded its footprint in Hong Kong

market with the acquisition of a residential site in Tuen Mun

for HK$3.82bn in Jul 15.

Sino Land returns to expansion mode. Sino Land acquired a

site in Sai Kung for HK$609m or HK$11,804psf. This low

density project will provide GFA of 51,591sf upon

completion. This acquisition should further strengthen Sino

Land’s presence in Sai Kung’s housing market. Followingthis purchase, Sino Land now has three projects in Sai Kung

with combined GFA of 0.47m sf. Similarly, small developers

such as Wang On Group and Chuang’s Consortium have

also replenished their land bank, capitalising on the

government’s increased land supply.

Housing supply is rising but not excessive. With the

government's concerted effort in expediting land supply and

developers' intention of building more small-sized units in

recent years, our analysis suggests that future housing

supply will normalise gradually in the years to come. We

estimate that new residential unit completions will average17,000 p.a. between 2015-18. This represents a 49%

increase from the 5-year average completion of c.11,400

units in 2010-14. Hence, we believe the developers will

maintain their reasonable pricing strategy to move sales.

Nonetheless, supply is by no means excessive from a

historical perspective. Between 1996 and 2014, the number

of new unit completions and take-ups averaged 18,300.


12/104


Page 12

Residential land sales YTD 2015

Date Project /Lot No Locat ion Locat ion Usage GF A Land

Premium

Land

Premium

D ev e lo pers Es t. n o of

units

(sf ) (HK m) (HK psf )

Gov ernment t ender

Jan-15 STTL 587 Shatin NT R 148,057 773 5,221 Wang On Group 400

Jan-15 KCTL 518 Kwai Chung NT R/C 55,521 372 6,700 Global Convention 80

Feb-15 TMTL 514 Tuen Mun NT R/C 143,054 429 2,997 Chuang's Consortium 250

Feb-15 NKIL 6532 Kowloon Tong Kln R 116,379 2,390 20,535 Kerry Props 50

Mar-15 TPTL 225 Tai Po NT R 900,508 3,480 3,864 SHKP 1,300

Apr-15 Lot 1909 in DD 100 Sheung Shui NT R 33,110 302 9,127 CSI Properties 6

Apr-15 Lot 1181 in DD 215 Sai Kung NT R 51,591 609 11,804 Sino Land 25

May-15 STTL 605 Ma On Shan NT R 225,913 1,469 6,502 Citic Pacific 220

Jun-15 TMTL 539 Tuen Mun NT R/C 354,566 1,319 3,720 SHKP 300

Jun-15 TMTL 500 Tuen Mun NT R 785,334 3,629 4,621 Henderson Land 1,000

Jun-15 Lot 1872 in DD Cheung

Chau

Cheung Chau NT R 29,364 69 2,346 Private developer 15

Jul-15 TMTL 541 Tuen Mun NT R/C 841,737 3,822 4,541 China Vanke 1,200

MT RC tender

Jan-15 Lohas Park Package 6 Tseung Kwan O NT R 1,474,200 3,345 2,269 Nan Fung 2,400

Feb-15 Tin Wing Stop Tin Shui Wai NT R/C 982,280 1,520 1,547 SHKP 1,500

Jun-15 Lohas Park Package 7 Tseung Kwan O NT R/C 1,235,277 3,880 3,141 Wheelock & Co. 1,250

URA T ender

Mar-15 Fuk Wing Street project Sham Shui Po Kln R/C 54,142 Emperor International 92

Source: Lands Department, Local press, DBS Vickers


13/104


Page 13

Office

Central office market heating up. Leasing activities in

Central’s office market has been gaining momentum,

especially after Apr 15. This was fuelled by a sustained rise

in demand from Mainland China companies, banking and

financial institutions in particular. For example, Yunfeng

Capital, founded by Jack Ma, Chairman of Alibaba Group,

has leased 12,000sf at One Exchange Square while China

Merchant Capital has taken up 15,000sf at Three Pacific

Place. According to Jones Lang LaSalle, Mainland China

financial services and trading securities firms are an

increasingly important source of leasing demand in Central,

accounting for c.40% of net take-ups there in 1H15.

Another significant factor is that multinational financial

services firms are seeking space for expansion. Bloomberg

leased an additional c.40,000sf at Citibank Plaza forexpansion purposes, in addition to its existing space at the

nearby Cheung Kong Center.

This saw office vacancy in Central tightening considerably

from 3.7% in Dec 14 to 2.3% in May 15, the lowest since

the onset of Global Financial Crisis in Nov 2008. Top grade

office buildings, One IFC and Two IFC, are virtually fully

leased. Citibank Plaza, with vacancy of c.25% in Dec 14,

successfully tapped on the growing demand in Central,

securing high-profile tenants. Besides Bloomberg, BlackRock

and Thomson Reuters also took up space at Citibank Plaza,

relocating from Cheung Kong Center and Island East

respectively. New tenants included a new set-up in HongKong. With net take-up of >180,000sf over the past six

months, Citibank Plaza sees its committed occupancy level

recovering to c.95%.

With Central office vacancy reaching a six-year low, office

rental growth accelerated, particularly from 2Q15.

According to Jones Lang LaSalle, Central office rents rose

7% in 1H15, which contributed to the overall office rental

growth of 4.7% during the period. But office rents in

Central are still 8-9% lower than the previous highs in mid-

2011, and 16% off its historical peak recorded in 3Q08.

Office vacancy rate – Central

0.0

1.0

2.0

3.0

4.0

5.0

6.0

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

%

May-15: 2.3%

Source: Jones Lang LaSalle

Office vacancy rate – Overall

2.3 2.5

1.2

0.6

6.2

3.7

2.5 2.6

1.1

0.6

7.1

3.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

C e n t r a l

W a n c h a i /

C a u s e w a y B a y

H K E a s t

T s i m s h a t s u i

K o w l o o n E a s t

O v e r a l l

May-15 Apr-15%


Office rental growth in 1H15

7.0

2.3

1.2

4.3

1.6

4.7

0

1

2

3

4

5

6

7

8

C e n t r a l

W a n c h a i /

C a u s e w a y B a y

H o n g K o n g

E a s t

T s i m S h a

T s u i

K o w l o o n

E a s t

O v e r a l l

%



14/104


Page 14

Other sub-markets also registered gradual improvement in

vacancy rates. Vacancy at Tsim Sha Tsui was the lowest

among major office submarkets, at only 0.6% in May 15,

down from Dec 14’s 1.1%. The improvement was

underpinned by leasing demand from banks. For example,

UBS leased c.23,000sf at One Peking to house their wealth

management staff. With the tight vacancy environment,

office rents in Tsim Sha Tsui grew 4.3% in 1H15, according

to Jones Lang LaSalle.

Office vacancy rate – Tsim Sha Tsui

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

%

May-15: 0.6%


Vacancy in Island East remained low at 1.2% in May 15,

with key office buildings virtually fully let. The plannedTaikoo Place Redevelopment Ph 2 would reduce space

availability and tighten vacancy further in the medium term.

Office vacancy rate – Island East

0.0

0.5

1.0

1.5

2.02.5

3.0

3.5

4.0

4.5

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

%

May-15: 1.2%


Overall, the fall in office vacancy was modest, declining to

3.7% in May 15, from Dec 14’s 4.2%. Office vacancy would

have been even tighter if not for the relatively highervacancy of 6.2% for Kowloon East partly due to the

completion of some new buildings such as 15 Chong Yip

Street.

Office vacancy rate – Overall

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

%

May-15: 3.7%


Office vacancy rate – Kowloon East

0.0

5.0

10.0

15.0

20.0

25.0

30.0

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

%

May-15: 6.2%


Positive demand outlook. New financial liberalisation

measures between China and Hong Kong should provide a

boost to the Hong Kong financial market and be the key

force driving office demand growth in Central in the

foreseeable future.

Hong Kong’s Securities and Future Commission and China

Securities Regulatory Commission announced the scheme of

Mainland-Hong Kong Mutual Recognition of Funds, which is

implemented in Jul 2015. This scheme allows funds

domiciled and operating in Hong Kong to be distributed in

China and vice versa. In other words, this represents

opportunities for offshore funds to tap the enormous retail

fund market in China. In order to tap on this uncharted

market, an increasing number of fund houses are expected

to establish or expand their footprint in Hong Kong. This

should stimulate office demand, particularly in Central, over

time.

The proposed Shenzhen-Hong Kong Stock Connect is

widely anticipated to be launched in 2H15. Like Shanghai-


15/104


Page 15

Hong Kong Stock Connect pilot scheme, this mutual market

access scheme should open up more business opportunities

for brokers and related financial service providers. This in

turn translates into more office space required.

Central to lead the pack. All factors considered, we areupbeat on the outlook of Central office market, which

should stand out among the various locations. We forecast

office rents in Central will rise 10-12% p.a. in 2015. Other

decentralised submarkets, excluding Kowloon East, should

stage 5% rental growth in 2015. Strata-titled office

buildings in Kowloon East should see marginally lower rents

in 2015 given increased market competition, but rents for

those with single landlords are expected to remain stable.

As such, the rental differential between Central and

decentralised locations should widen again in the coming

year.

Grade A office rental gap between Traditional Centraland selected districts

3040

5060708090

100110120

A u g - 0 7

F e b - 0 8

A u g - 0 8

F e b - 0 9

A u g - 0 9

F e b - 1 0

A u g - 1 0

F e b - 1 1

A u g - 1 1

F e b - 1 2

A u g - 1 2

F e b - 1 3

A u g - 1 3

F e b - 1 4

A u g - 1 4

F e b - 1 5

Wanchai Quarry Bay

Tsim Sha Tsui Kowloon East

HK$psf

Source: Knight Frank, DBS Vickers

Fit-out cost has been rising consistently in recent years.

According to Colliers, fit-out costs (excluding I.T. and

furniture) increased from HK$400-1,000psf in 2012 to

HK$470-1,200psf in 2014. This represents 2-year CAGR of

8-10%. The high cost may discourage tenants from

relocating offices unless there are substantial rental cost

savings or productivity gains. Hence, we expect relatively

high retention rates.

Fit-out costs (excl I.T. and furniture)

0

250

500

750

1,000

1,250

2012 2013 2014

HK$psf

Source: Colliers

In 1H15, office price in Central rose 1.8%. An entire floor at

9 Queen’s Road Central fetched HK$480m or

HK$34,860psf, which is a new high for office property in

the city. The overall office capital values grew 1.7% in 1H15,

mainly led by Kowloon East.

Office capital value growth (1H15)

1.8

1.1 1.1

1.5

2.6

1.7

0

1

2

3

C e n t r a l

W a n c h a i /

C

a u s e w a y B a y

H o n g K o n g

E a s t

T s i m S h a

T s u i

K o w l o o n

E a s t

O v e r a l l

%


Billion Development a key player in office sales market.

Unlisted Billion Development is selling three newly built

office buildings in Kowloon East, including 10 Shing Yip

Street, 52 Tsun Yip Street and 15 Chong Yip Street, on a

strata-titled basis. The company also substantially pre-sold

its two commercial developments in Shatin (STTL 412 &

STTL 413) at an ASP of c.HK$7,000psf. These two projects

are close to each other near the Shek Mun MTR Station. Tai

Cheung also commenced the strata-titled sales of Metropole

Square in the area. This building was converted into officeuse under the government‘s revitalisation policy for

industrial buildings. Reportedly, four floors have been sold

for >HK$400m or HK$6,000psf so far.


16/104


Page 16

One HarbourGate in the limelight. In 2H15, One

HarbourGate in Hung Hom should remain as the focus in

the investment sales market. This project contains primarily

twin office towers erected along the Hung Hom waterfront

with GFA of 0.6m sf. Superstructure works are in progress

with project completion scheduled in 2016. Wheelock

intends to sell this office development on en bloc basis.

When completed, One HarbourGate will be one of the

iconic office developments along the coastline of Victoria

Harbour, an ideal location for large corporates to showcase

their brands. We believe that this project should appeal

strongly to renowned Mainland Chinese firms.

One HarbourGate (Wheelock & Co)

Source: DBS Vickers

Despite the double stamp duty, a rising number of

companies are considering buying instead of renting office

premises as long-term real estate solutions as this would

allow them to consolidate their scattered business units

under the same roof to enhance efficiency. According to

Property Consultant Colliers, the proportion of sales

transactions for office premises of >8,000sf GFA that are for

owner occupation has grown substantially from 17% in

2012 to 62% in 2015 while that for investments has

dropped from 83% in 2012 to 38% in 2014.

Ratio of investors and owner occupiers for salestransaction (over 8,000sf GFA)

83%74%

38%

17%

26%

62%

0%

20%

40%

60%

80%

100%

2012 2013 2014

Investor Owner Occupier

Double stamp duty

Source: Colliers

Kowloon East to dominate new office supply. This year, the

government continues to supply land for office development

in Kowloon East as part of its plan to energize the area into

CBD2. Two commercial lots were sold via tender in 1H15,

and will provide GFA of 1.37m sf when completed. Since Jul

2011, the government has sold seven commercial sites in

Kowloon East. Upon scheduled completion in 2015-19,

these sites will offer a combined GFA of 4.8m sf or 0.96m sf

p.a. on average.

The Link REIT ventures into office sector. In Jan 15, a

consortium between The Link REIT and Nan Fung won the

tender for a commercial site (NKIL 6512) in Kwun Tong for

HK$5.86bn or HK$6,630psf. This acquisition came shortly

after The Link REIT obtained unitholders' approval to modify

its investment mandate to include property development,

and also marked its first foray in Hong Kong office market.

Nan Fung has development expertise and this should help

mitigate any execution risk. The consortium plans to develop

the site into an office project with some retail element, with

GFA of 883,888sf. The Link REIT has a 60% stake and Nan

Fung has 40% in this office development which will be

retained for long-term investment upon completion.


17/104


Page 17

NKIL 6512 (The Link REIT and Nan Fung)

Source: DBS Vickers

In May 15, a consortium comprising Billion Development,

CSI Properties and Sino Land defeated twelve developers to

secure a commercial site in Kowloon Bay through

government tender for HK$3.04bn. This translated into an

accommodation value of HK$6,199psf, 7% lower than the

neighbouring site acquired by The Link REIT/Nan Fung

consortium. Upon completion, this site will provide GFA of

490,188sf for office use. Unlisted Billion Development has a

40% stake in this project, with CSI Properties and Sino Land

each holding 30%. Billion Development has good

understanding of the Kowloon East office market. The

company just completed three office developments in KwunTong. Its two completed office developments, Billion Centre

and YHC Tower, are close to the newly acquired site. Sino

Land has also developed two office projects in Kowloon Bay,

namely Exchange Tower and Kowloon East 18. Despite their

strong development expertise, the joint venture

arrangement enables the developers to share investment

risks.

NKIL 6313 (Billion Development, Sino Land & CSI Props)

Source: DBS Vickers

Redevelopment of Wharf T&T Square has commenced, with

demolition work in progress. Wharf T&T Square is located in

close proximity to Wheelock's One Bay East and Mapletree

Investment's office project along the Kwun Tong waterfront.

Wharf will redevelop this building into a commercial tower

which offers office GFA of 513,000sf, with full completion

scheduled for 2019.

Wharf T&T Square Redevelopment

Source: DBS Vickers

In order to maximise the development potential, New World

Development plans to redevelop the Kut Cheong Mansion

in Quarry Bay into an office building with GFA of 487,500sf.

Kut Cheong Mansion is located adjacent to AIA's Stanhope

House and just 3 minute walk from Quarry Bay MTR Station.

New World has a 90% stake in this redevelopment after

acquiring 50% interest from its parent Chow Tai Fook

Enterprise in Jan 2015. Demolition of the existing building

has commenced with project completion expected in 2018.

This, coupled with Swire Properties’ large-scale Taikoo Place

Redevelopment, will dominate new office supply in Island

East.

Kut Cheong Mansion Redevelopment (New World Dev)

Source: DBS Vickers


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Page 18

Island East offices to benefit from infrastructure

improvements. Currently, Central-Wan Chai Bypass and

Island Eastern Corridor Link are under construction. Upon

completion in late 2017, the project provides a 4.5km long

dual three-lane trunk road with a 3.7km long tunnel,

connecting Rumsey Street Flyover at Central with Island

Eastern Corridor at North Point near City Garden. Travelling

time will be shortened to 5 minutes from >15 minutes

currently. With improved transportation infrastructure,

Island East should hold stronger appeal to office tenants in

the medium term.

Central-Wanchai Bypass & Island East Corridor Link

Source: Highway Department


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Page 19

Major office supply

Pro jec t L oc at ion G F A (sf ) Dev elopers Remark s

2015

Tower 535 Causeway Bay 130,000 Phoenix Property Inv estors

A IL 354, 41 Heung Yip Road Wong Chuk Hang 323,958 Cheung Kong Property Completely sold

W50 Wong Chuk Hang 120,000 SHKP Almost sold out

2-12 Observ atory Road T sim Sha Tsui 165,000* Henderson Land/ Lai Sun Dev elopment Preleasing in progress

One Bay East Kwun Tong 1,024,700 Wheelock & Co Completely sold

52-56 Tsun Yip Street Kwun Tong 371,176 Billion Dev elopment (Unlisted) On sale

15 Chong Yip Street Kwun Tong 266,447 Billion Dev elopment (Unlisted) On sale

2 Ng F ong Street San Po Kong 314,214 Billion Dev elopment (Unlisted) F or sale

2016

Shanghai Commercial Bank Building Central 114,000 Shanghai Commercial Bank Partly for own use

Chinachem Central I Central 81,700 Chinachem

One HarbourGate Hung Hom 590,000 Wheelock & Co Apply ing for pre-saleconsent

Goldin F inancial Global Centre Kowloon Bay 852,501 Goldin F inancial

STTL 463 Shatin 430,395 Billion Dev elopment (Unlisted) Largely sold

STTL 412 Shatin 351,980 Billion Dev elopment (Unlisted) Largely sold

2017

Chinachem Central II Central 90,000 Chinachem

NKIL 6311 Kowloon Bay 333,121 Priv ate dev eloper

NKIL 6312 Kowloon Bay 550,030 Swire Properties

KTIL 174 Kwun Tong 471,229 SHKP/Wong's International

2018 and beyond

Sunning Plaza/ Sunning Courtredevelopment Causeway Bay est.360,000 Hysan Dev elopment

Asian House redev elopment Wan Chai 314,000 Chinachem

Kut Cheong Mansion Redevelopment Quarry Bay 487,500 New World Dev elopment

Taikoo Place redev elopment (Ph1) Quarry Bay 1,020,000 Swire Properties

Taikoo Place redev elopment (Ph2) Quarry Bay 980,000 Swire Properties

8-10 Wong Chuk Hang Road Wong Chuk Hang 382,500 Swire Properties/China Motor Bus

34 Wong Chuk Hang Road Wong Chuk Hang 166,400 Priv ate dev eloper

A IL 309 Wong Chuk Hang 139,000 Priv ate dev eloper

New World Centre redevelopment Tsim Sha Tsui TBD New World Dev elopment

NKIL 6410 Cheung Sha Wan 193,535 F irst Group (Unlisted)

NKIL 6313 Kowloon Bay 490,188 Billion Dev / Sino/ CSI Props

KTIL 761 Kwun Tong 660,301 Mapletree Inv estment

Wharf T&T Square Redev elopment Kwun Tong 596,200 Wharf

NKIL 6512 Kwun Tong 883,888 The Link REIT/ Nan FungKCTL 495 Kwai Chung 228,033 Hon Kwok Land

* Include retail portionsSource: Company, Local presses, DBS Vickers


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Page 20

Retail

Falling retail sales. In the first five months of 2015, overall

retail sales value in Hong Kong fell 1.8% y-o-y to HK$209bn,

led by a decline in sales for expensive hard luxuries. If not

for the 19% growth in other consumer durable goods from

sales of certain smartphone and smartwatch models, retail

sales value would have fallen by a larger 3%. In addition,

some department stores had brought forward the seasonal

sales promotion period, thus mitigating the decline in retail

sales.

Monthly growth of total retail sales value

(20)

(10)

0

10

20

30

40

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

Yoy, % May-15: -0.1% y-o-y

5M15: -1.8% y-o-y

Source: CEIC

Yearly growth of total retail sales value

(5)

0

5

10

15

20

25

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

5 M 1 5

Yoy, %

Source: CEIC

Monthly retail sales value growth – Other consumerdurable goods

(50)

0

50

100

150

200

J a n - F e b 0 8

M a y - 0 8

A u g - 0 8

N o v - 0 8

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - F e b 1 1

M a y - 1 1

A u - 1 1

N o v - 1 1

M a r - 1 2

J u n - 1 2

S e p - 1 2

D e c - 1 2

A p r - 1 3

J u l - 1 3

O c t - 1 3

J a n - F e b 1 4

M a y - 1 4

A u - 1 4

N o v - 1 4

M a r - 1 5

Yoy, % May-15: 62.3% y-o-y

5M15: 19.0% y-o-y

Source: CEIC

Slowing inbound tourism was the culprit. Jewellery, watches

& clocks and valuable gifts posted a 16.8% drop in sales

value in 5M15. The ongoing anti-corruption campaign in

China continued to weigh on demand for expensive luxury

goods. More importantly, foreign currency depreciation is

encouraging more tourists to spend overseas instead of

Hong Kong and this has taken a toll on sales of the above

items. In 1Q15, Mainland tourist arrivals to Japan more than

doubled in 5M15. On the other hand, the growth in the

number of Mainland Chinese visiting Hong Kong has been

moderating since the beginning of 2015 and even posted a10% decline in Mar 15. As growth in Mainland Chinese

tourist arrivals slowed to 5.9% in 5M15 from 2014’s 16%,

total visitor arrivals in Hong Kong grew by just 3.9% to 25m

in 5M15. Those under the Individual Visit Scheme recorded

declines of 4.8-15.7% y-o-y between Mar and May 2015.

As such, growth for 5M15 narrowed to a marginal 0.4%

against 2014’s 14.1%

Monthly retail sales value growth – jewelleries/watches

(40)

(20)

0

20

40

60

80

J a

n - F e b 0 8

M a y - 0 8

A u g - 0 8

N o v - 0 8

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a

n - F e b 1 1

M a y - 1 1

A u g - 1 1

N o v - 1 1

M a r - 1 2

J u n - 1 2

S e p - 1 2

D e c - 1 2

A r - 1 3

J u l - 1 3

O c t - 1 3

J a

n - F e b 1 4

M a y - 1 4

A u g - 1 4

N o v - 1 4

M a r - 1 5

Yoy, % May-15: -15.0% y-o-y

5M15: -16.8% y-o-y

Source: CEIC


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Page 21

Growth of visitor arrivals from China to Japan

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

5 M 1 5

May-15: 134% y-o-y

5M15: 106% y-o-y

Persons

Source: Japan National Tourism Organisation

Visitor arrival growth - overall

(20)

(10)

0

10

20

30

40

50

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

Yoy, %May-15: 3.6% y-o-y

3.9% y-o-y5M15:

Source: CEIC

Visitor arrival growth - China

(20)

(10)

0

10

20

30

40

5060

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

Yoy, %May-15: 5% y-o-y

5.9% y-o-y5M15:

Source: CEIC

Visitor arrival growth – Individual Visit Scheme

(30)

(20)

(10)

0

10

20

30

40

50

60

70

80

J a n - 0 8

J u l - 0 8

J a n - 0 9

J u l - 0 9

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

Yoy, %May-15: -4.8% y-o-y

0.4% y-o-y5M15:

Source: CEIC


22/104


23/104


Page 23

Value growth of total restaurant receipts

(1)

1

3

5

7

9

11

1 Q 0 9

2 Q 0 9

3 Q 0 9

4 Q 0 9

1 Q 1 0

2 Q 1 0

3 Q 1 0

4 Q 1 0

1 Q 1 1

2 Q 1 1

3 Q 1 1

4 Q 1 1

1 Q 1 2

2 Q 1 2

3 Q 1 2

4 Q 1 2

1 Q 1 3

2 Q 1 3

3 Q 1 3

4 Q 1 3

1 Q 1 4

2 Q 1 4

3 Q 1 4

4 Q 1 4

1 Q 1 5

Yoy, %

Source: CEIC

Multiple entry arrangements for Shenzhen residents

tightened. In view of rising public concerns over social

impact brought about by excessive growth in the number of

Mainland Visitors (especially in districts near the border),

the ”One Visa, Multiple Entry” arrangement was modified

in Apr 2015. Since the government has been reviewing the

multiple entry permit arrangement for almost a year, this

news was not a surprise to the market.

First introduced in 2009, the multiple entry permit

arrangement allows qualified Shenzhen residents to make

unlimited visits to Hong Kong. This boosted the growth of

day-trippers since then, with the number of Mainland

tourists visiting Hong Kong under the ”One Visa, Multiple

Entry” surging rapidly from 1.47m in 2009 to 14.85m in

2014, which represented 31.4% of total China tourist

arrivals.

Number of visitors under “ Multiple-entry endorsements”

0%

5%

10%

15%

20%

25%

30%

35%

0

3

6

9

12

15

2009* 2010 2011 2012 2013 2014

Visitors under Multiple-entry endorsements (LHS)

% of visitors from China (RHS)

m persons

Source: Hong Kong Tourism Broad

With the implementation of the modified multiple entry

permit arrangement, eligible Shenzhen permanent residents

are allowed to visit Hong Kong once a week. This should

crack down the activities of grey good traders from

Shenzhen. Some same-day visitors who currently travel to

Hong Kong frequently would also be impacted by new

policy. It is estimated that the modified policy will cut the

number of Mainland tourist arrivals by 4.6m p.a..

China day-trippers as a % of total China visitor arrivals

3 0 . 2

3 2 . 8 3

6 . 4

3 6 . 0

3 7 . 9 4

1 . 3 4

4 . 4

4 6 . 2

4 8 . 5 5

1 . 6 5

6 . 7

5 8 . 1

5 9 . 6 6

2 . 6

0

10

20

30

40

50

60

70

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0�

150714 insights value in hong kong developers

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