Jakarta Real Estate Portal

Jones Lang LaSalle: Hong Kong Property Market Continues to Look Bright in the Coming Decade

HONGKONG AND MACAU, 18 June 2008 – Hong Kong’s property market will tell a long-term growth story in the coming decade, leveraging on its strengthening economic ties with China, a growing population and structural shifts in income distribution, according to Jones Lang LaSalle’s latest white paper (Hong Kong – A Bright Decade Forward).

China’s rising influence on Hong Kong’s economy paves the way for brighter prospects
While many of the world’s major financial markets are battling the credit crunch, Hong Kong’s growing connection with the Chinese economy has helped it weather the negative impacts and prolong its economic boom. ‘China is the key. While the US remains a defining factor for Hong Kong’s economic growth, China is quickly catching up to become another econmic driver of the city. Hong Kong is now equipped with a solid platform from the Mainland to extend this robust growth into the next decade, which will ultimately benefit the city’s property market in the medium to long term,’ said Marcos Chan, Head of Research, Hong Kong and Macau.

Grade A Office
Hong Kong’s office market is currently enjoying the effects of a record-breaking upswing. Unprecedented levels of demand, fuelled by a booming economy and limited availability of supply, especially in the traditional core area office markets, have been driving vacancies down and rental and capital values up. Going forward, the dual-charged growth engine of the import/export trade and the finance, insurance, real estate and business services (FIREBS) sectors will continue to drive Hong Kong’s Grade A office market. These two sectors combined have long been taking up the majority, as high as 75%, of the city’s Grade A offices.

In the ten years to 2007, the total value of Pearl River Delta (PRD) and Hong Kong exports (including domestic and re-exports) surged 461%, from HKD 2.1 trillion to HKD 11.8 trillion. Correspondingly, headcounts in Hong Kong’s import/export trade sector rose 51% to a total of 544,100 over the same period. Export projections from the Economist Intelligence Unit (EIU) suggest that China will exceed Germany to become the world’s largest exporting country, accounting for 15% of the total global export trade by end-2012. According to the analysis by Jones Lang LaSalle, for every 10% change in PRD’s export growth, a corresponding 1% change in Hong Kong’s import/export trade sector headcount is observed, albeit at a diminishing rate. Thus, growth in this sector will help drive demand for Grade A offices.

Likewise, the expansion of the FIREBS sector will also push demand for Grade A office space higher. For every 1.5% growth in Hong Kong’s FIREBS GDP, a 1% rise in FIREBS headcount is observed. Hong Kong’s strengthening role as one of the fund raising centres for Mainland enterprises and its effort to move towards the world’s – and not only the region’s – premier financial centre is expected to drive office space demand in Hong Kong in the next decade.

‘Talks regarding Hong Kong’s Grade A office market have generally centred around the sustainability of the record-high rentals that are currently achieved; but in fact, rentals remain relatively affordable in the overall business environment compared with historical trends, judging from a tenant affordability angle (i.e. total rental payment as a percentage of services sector GDP). Together with the expected demand, further rental growth is not impossible. While the cyclical nature of the economy and property market may see rental levels fluctuate in the near term, they are unlikely to touch historical lows.’ said Chan.

Residential
Hong Kong will see growing residential demand in the next decade from a growing population and household pool, a healthily developing economy and rising household incomes.

An ageing population will weigh more heavily in Hong Kong’s demographic structure in the next decade. As retirees have little incentives to bear property market risks, except for those in the highest wealth segment, a rise in the senior population is deemed as a negative factor for the housing market. However, Hong Kong’s population is expected to remain steadily on the rise and together with the continuing decline in household size, some of the negative impacts from the ageing population will likely be cushioned. Indeed, the group comprising people aged 25–39 will hold a steady population share in the next decade. This group carries the highest income and the strongest desire to acquire or upgrade housing.

Hong Kong’s household size, which now averages at 3 members per household compared with 3.3 members per household ten years ago, is expected to gradually reduce to 2.8 by 2017. This would lift the number of households by 16%, from 1.17 million in 2007 to 1.36 million in 2017.

Economic growth and income rise will also support capital value appreciation. Based on the projected annual growth of real GDP and the inflation rate, Hong Kong’s nominal household income is expected to grow at an average of 6.4% (5.2% and 7.6% for worst and best case scenarios, respectively) per annum, improving buyers’ affordability.

Chan commented, ‘If we hold the current affordability and the average loan-to-value ratios constant for the next ten years, residential prices will grow by 63% between 2007 and 2017 to an average of just below HKD 7,000 per sq ft; and under a more optimistic scenario, this could be as much as over 80%. Smart investors, if they are able to catch the tides, should be able to have even higher returns. The trend of reducing household size and a growing pool of middle-class double income, no kids (DINK) families should lead growing market interest in medium-end to high-end boutique apartments. Top-end luxury properties will remain as the crown jewels as Hong Kong continues to strengthen its position as China’s top international funding platform. Demand from high-income expatriates, signature entrepreneurs and opportunistic investors will lend great long-term support to capital value growth in this market segment.’

Retail
Concerns that an ageing society will limit growth in the retail market by puncturing domestic consumption demand should be balanced by a few emerging positive trends. In the next decade, Hong Kong’s retail sales and hence the city’s retail property market will remain firm, stemming from growing household income, a structural shift in the consumers’ propensity to spend, as well as soaring tourist arrivals.

Hong Kong is seeing a growing pool of high-net-worth individuals. Also occurring is a structural change in income distribution among different age groups. Today, all groups aged above 35 have higher incomes than in the mid-1990s, with the group having the highest income shifting from the 25–34 to the 34–44 age bracket. The senior members of Hong Kong’s labour force are also enjoying a prolonged career life and higher incomes than their counterparts a decade ago as experienced and professional workers are now higher valued . This shift in income distribution will become even more pronounced as Hong Kong continues to undergo structural changes alongside the emergence of the Mainland China economy. Rapid income growth will ultimately translate into consumption power, the overall propensity to consume will rise by 10% in ten years, increasing domestic retail sales by 83–129% by 2017 to an aggregate of HKD 341–428 billion. Thus, the effect of an ageing population will be largely cushioned.

Generous tourist spending is also expected to hold up retail hopes, reaching HKD 141–306 billion in 2017 compared with HKD 61.6 billion in 2007, based on the city’s medium-term and long-term compound average growth rate (CAGR) of tourist shopping expenditure growth. The emergence of Hong Kong, Macau and the rest of the PRD as a single tourist destination will ensure a sustainable level of visitor arrivals and shopping expenditure growth for Hong Kong. The retail market will see a continuous uptrend towards high-end shopping, a move that will cater to the fast-growing middle-class families from the Mainland and the emerging trend of DINK families in Hong Kong.

Chan continued, ‘If we combine the domestic and tourist retail sales growth projection, Hong Kong’s total retail sales will grow by a CAGR of 6.9–11.5%, reaching HKD 483–734 billion by 2017. Thus, despite mounting pressure from an ageing population, a setback in the retail market is highly unlikely.’

The decade forward
Speaking about the overall prospects for the decade ahead, Chan said, ‘The fast-growing China economy has been a significant driver of the fast track of Hong Kong’s economic rebound from its trough in 2003 and supported the city’s economic and property market peaks in recent times. This emerging economic trend will likely be extended into the next decade, painting a positive macro-economic picture for Hong Kong’s long-term development. A number of micro-market factors are also pointing Hong Kong’s property sectors to a rosy outlook. Among these are the continuous development of Hong Kong into one of China’s corporate funding platforms, changes in demographic patterns and the emergence of PRD into a single commercial and tourism hub. Thus, we expect to see a bight decade ahead for Hong Kong’s property market.’