Hong Kong Real Estate Report - 2016

2016
www.bmiresearch.com
HONG KONG
REAL ESTATE REPORT
INCLUDES 5-YEAR FORECASTS TO 2019
Published by:BMI Research

Hong Kong Real Estate Report 2016
Part of BMIs Industry Report & Forecasts Series
Published by: BMI Research
Copy deadline: October 2015
ISSN: 2040-7602
BMI Research 2015 Business Monitor International Ltd

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DISCLAIMER
All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of
publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor
International Ltd accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the
publication. All information is provided without warranty, and Business Monitor International Ltd makes no representation of warranty of any kind
as to the accuracy or completeness of any information hereto contained.
Part of BMIs Industry Report & Forecasts Series
Published by: BMI Research
Copy deadline: October 2015
ISSN: 2040-7602
BMI Research 2015 Business Monitor International Ltd

Senator House All rights reserved.
85 Queen Victoria Street
London All information contained in this publication is
EC4V 4AB copyrighted in the name of Business Monitor
United Kingdom International Ltd, and as such no part of this
Tel: +44 (0) 20 7248 0468 publication may be reproduced, repackaged,
Fax: +44 (0) 20 7248 0467 redistributed, resold in whole or in any part, or used
Email: subs@bmiresearch.com in any form or by any means graphic, electronic or
Web: http://www.bmiresearch.com mechanical, including photocopying, recording,
taping, or by information storage or retrieval, or by
any other means, without the express written consent
of the publisher.
DISCLAIMER
All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of
publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor
International Ltd accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the
publication. All information is provided without warranty, and Business Monitor International Ltd makes no representation of warranty of any kind
as to the accuracy or completeness of any information hereto contained.
CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................... 9
Political ................................................................................................................................................. 11
Economic ............................................................................................................................................... 12
Operational Risk ..................................................................................................................................... 13
Industry Forecast .............................................................................................................. 15

Table: Office Rental Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table: Office Yields 2010-2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Industry Forecast .................................................................................................................................... 22
Table: Retail Rental Rates 2010-2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Table: Retail Yields 2010-2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Industry Forecast .................................................................................................................................... 27
Table: Industrial Rental Rates 2010-2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Table: Industrial Yields 2010-2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Residential/Non-Residential Construction - Outlook And Overview ................................................................... 32
Table: Residential and Non-Residential Building Industry Data (Hong Kong 2013-2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Table: Residential and Non-Residential Building Industry Data (Hong Kong 2019-2024) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Residential Building ............................................................................................................................... 34
Non-Residential Building ......................................................................................................................... 37
Social Infrastructure ............................................................................................................................... 38
Table: Hong Kong Key Projects: Construction And Social Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Macroeconomic Forecasts ............................................................................................... 42

Economic Analysis ................................................................................................................................... 42
Table: Economic Activity (Hong Kong 2010-2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Industry Risk Reward Index ............................................................................................. 47

Hong Kong Risk/Reward Index ................................................................................................................... 47
Table: Asia Real Estate Risk Reward Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Rewards ............................................................................................................................................... 47
Risks .................................................................................................................................................... 48
Market Overview ............................................................................................................... 50
Competitive Landscape .................................................................................................... 53

Property Developers ............................................................................................................................... 53
REITS .................................................................................................................................................. 55
Property Managers ................................................................................................................................ 56
Demographic Forecast ..................................................................................................... 59

Table: Population Headline Indicators (Hong Kong 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Business Monitor International Ltd Page 4

Table: Key Population Ratios (Hong Kong 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Table: Urban/Rural Population & Life Expectancy (Hong Kong 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Table: Population By Age Group (Hong Kong 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Table: Population By Age Group % (Hong Kong 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Methodology ...................................................................................................................... 64
Industry Forecast Methodology ................................................................................................................ 64
Sources ................................................................................................................................................ 65
Risk/Reward Index Methodology ............................................................................................................... 66
Table: Real Estate Risk/Reward Index Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

BMI Industry View
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.

SWOT
SWOT Analysis
Strengths
Hong Kong is a well-established financial centre and this will continue to be a key
source of demand for office space.

Hong Kong remains a dominant retail location amongst global cities as well as one of
the most expensive retail locations in the world in terms of rental costs.

ASEAN trade integration will prevent exports bypassing Hong Kong's distribution
from China, and support demand for industrial warehouse space.
Weaknesses
Lower spending by Chinese tourists will have a detrimental impact on the retail sector
and slow leasing activity in the real estate market

The slowdown in the Chinese economy over the medium term will inevitably impact
on trade. This in turn will curb the level of take-up for storage space

Available area for development in commercial real estate is limited due to the dense
array of establishments and lack of required land.

Appreciation in the HKD is affecting trade volumes, exports from are dwindling and
affecting demand for industrial real estate space.
Opportunities
Hong Kong-Shenzhen Connect supports demand for office space from emerging
corporates on the back of this co-operation.

Smaller shopping malls away from tourist spots could become more attractive to
investors due to lower vacancy rates.

The conversion of warehouse space for office use is reducing vacancy rates in the
industrial sector, supporting rental prices.

E-commerce industry growth in the region is seeing growing demand for logistics
space in Hong Kong owing to its technological infrastructure.
Threats
Chinese tourists represent the majority of retail income, further restrictions on
exchange of luxury goods and visitation will harm retail demand.

SWOT Analysis - Continued

With development activity moving apace, there is a risk of over-supply of space due
to over construction if new projects are not phased or if occupier demand is weaker
due to a slower economy.

Higher currency value means that domestic exporters are struggling to remain
competitive, potentially could result in closures and rising industrial vacancies.

Political
SWOT Analysis
Strengths
Hong Kong benefits from a very high degree of political stability. Despite large-scale
public protests in 2014, such events are generally peaceful and the rule of law is
consistent.

China has a big stake in ensuring stability in Hong Kong. Beijing has generally stuck
to the Basic Law, the agreement signed between the UK and China covering the
handover of Hong Kong's sovereignty.
Weaknesses
Hong Kong is a very limited democracy. This means that public discontent can
emerge suddenly if the government makes policy missteps.
Opportunities
Hong Kong is slated to undergo further democratic reforms ahead of 2017's Chief
Executive election, although Beijing's preferred mode of election has so far been
underwhelming.
Threats
If Hong Kong or China continued to delay moves towards full democracy, this could
lead to further public anger and potential unrest. Protests are relatively common,
although they are generally peaceful.

Economic
SWOT Analysis
Strengths
Hong Kong is ideally located to act as a gateway for foreign companies into the
Chinese mainland. As a result, it is able to take advantage of the emergence of China
as a global economic powerhouse.

Hong Kong has one of the highest per capita GDPs in the Asia Pacific region.

Domestic demand is a key driver of the economy.
Weaknesses
Hong Kong has some of the highest land and labour costs in Asia and has found it
difficult to compete against low-cost China. This has led to the migration of Hong
Kong's manufacturing base to the mainland.

Hong Kong has a narrow tax base. This means that government finances fluctuate in
line with the global economic cycle.
Opportunities
In an attempt to boost Hong Kong's economic performance, the mainland Chinese
government has granted Hong Kong a number of concessions, including the Closer
Economic Partnership Arrangement, which gives goods duty-free access into
mainland China.

The Chinese government has also reduced the restrictions on mainland Chinese
tourists visiting Hong Kong. This has resulted in a wave of new tourist arrivals into the
territory, providing a major boost to Hong Kong's retail and tourism industries.
Threats
The economy remains dependent on the health of the global economy.

Hong Kong's population is forecast to age rapidly over the coming decades. This will
necessitate higher spending on health and welfare.

Operational Risk
SWOT Analysis
Strengths
The large and growing workforce results in a constant supply of cheap and flexible
labour.

The utilities infrastructure offers widespread access and a reliable supply of
electricity, water and internet services.

Businesses benefit from a low tax burden, which reduces overheads.

Hong Kong is one of the safest cities in the world for foreign workers and businesses.
Weaknesses
There is a focus on producing business administration students to the detriment of
engineering and science students, meaning there is a lack of skilled workers for
technical positions.

Hong Kong's reliance on fuel and water imports raises the cost of utilities and pushes
up overall operational costs for businesses.

Time-consuming property registration procedures are a burden for investors.

Traditional criminal 'Triad' gangs are prevalent and are capable of crimes against
legitimate businesses, such as extortion.
Opportunities
The rapid expansion of the university-educated labour force creates a large pool of
highly skilled employees from which businesses can recruit.

Continuing investment in transport infrastructure will allow Hong Kong to cope with
an expanding population and growing trade volumes.

Hong Kong's free-market economy and democratic aspirations could influence
mainland China to increase democracy and economic reform over the long term.

There is a low threat from terrorism, and comprehensive counterterrorism strategies
and forces are in place to counter terrorist activity.
Threats
A rapidly aging population will place further restrictions on the availability of labour.

SWOT Analysis - Continued

Increasing dependence on energy and water imports will raise the risk of shortages as
poor transmission infrastructure, climate change and growing demand impact
electricity production and water supply in China.

Close ties with the Chinese economy and international markets expose Hong Kong's
growth and trade volumes to risks from the slowdown in its parent state as well as
external shocks.

The importance of ICT to the economy in Hong Kong makes the territory vulnerable to
cybercrime and cyber-terrorism.

Industry Forecast
BMI View: We hold much optimism for the Hong Kong office sector. The outlook for demand from
financial corporates remains high, and supports rental growth amid low availability of supply that persists
in the market. Bullish views should boost investor confidence, and we expect to witness pent up
transactional activity in the wake of the Chinese external pressures subsiding.
Real growth in Hong Kong is forecasted to remain at 2.5% over 2016 as a result of a stronger currency and
regional pressures affecting trade dynamics. Post-2016 will see a jump in economic performance, 3.6% over
2017 and reaching 3.9% by 2019, as the ramifications felt from mainland China ease and the financial
sector in Hong Kong records greater performance; effectively increasing demand within the office sector.
Large interest is coming from mainland financial institutions looking to expand as a result of Beijing's
'Going Out' policy, with industry players of the opine that previous integration of commercial city banks
represent a trend of these constituencies obtaining full service licenses within Hong Kong, an aspect
expected to proliferate as recent inauguration of policy reducing approval time should accelerate this
process. Robust demand in the Hong Kong office sector is therefore expected to be a prominent theme over
the next two years; notably low vacancies in popular investment districts, ie, CBD, and lack of large-scale
supply in the market will buoyant rentals and maintain investor confidence.

Economic Growth Set To Accelerate

real GDP growth HKDbn 2010 prices (2012-2019)
3,000 5
4
2,000
1,000
2
0 1
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Real GDP, HKDbn 2010 prices (LHS)
Real GDP, HKDbn 2010 prices, % y-o-y (RHS)
BMI/Census and Statistics Department
The tertiary services sector, which covers all services (excluding industrial and construction) is a useful
proxy for future demand for office space, since majority of companies need at least some office space. GVA
growth is forecasted to be 7.5% over 2015, as a result of the strong financial services and promising stock
market that saw significant growth through H1 2015, however this figure is expected to drop to 6.5% for
2016 and average 7.5% over the 2017-2019 period. This brief drop can be attributed to the ephemeral
influences from the mainland economy that has detrimentally affected all three real estate sub-sectors.
Nevertheless, we view the positive rebound post-2016 underpinning the sustained demand for office space,
particularly for high quality, Grade A space.

Growth in Tertiary Services To Drive Demand for Office Space

tertiary services GVA output and % growth (2012-2019)
4,000 8
3,000 7
2,000 6
1,000 5
0 4
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Tertiary sector nominal GVA, HKDbn (LHS)
Tertiary sector HKD nominal GVA growth, % y-o-y (RHS)
BMI/UN
Maximum rental costs for best quality Grade A buildings in Hong Kong are HKD1301.71/sq m
(USD167.53/sq m). Lower quality office accommodations are significantly cheaper at HKD291.38/sq m
(USD37.50/sq m). Average rents have increased, albeit marginally (0.26%) over the period 2014-15 and are
currently at CNY796.54/sq m. The prospects for rental growth over the next five years remain positive and
we expect an upward trend due to a growing economy and a buoyant occupier market.

Table: Office Rental Rates
2010 2011 2012 2013 2014 2015
Min Max Min Max Min Max Min Max Min Max Min Max
Hong 23.30 117.00 16.10 139.60 27.10 159.60 34.20 168.30 37.50 167.53 37.50 167.53
Kong
USD per
square
metre
Hong 181.04 909.09 125.26 1086.09 210.30 1238.50 265.39 1306.01 290.63 1298.36 291.38 1301.71
Kong
HKD per
square
metre
Average 545.07 - 605.67 - 724.40 - 785.70 - 794.49 - 796.54 -
rent per
square
metre
(CNY)
% - - 11.12 - 19.60 - 8.46 - 1.12 - 0.26 -
growth
y-o-y
Source: BMI
The financial sector has been a key source of office demand in the real estate sector and will remain so in
the medium term. Hong Kong's economy has undergone a remarkable transformation in the past two
decades. There has been a rapid expansion in the services sector, with the sector now generating over 90%
of GDP. By meeting the challenges of rapid technological change and the increasingly intense competition
brought about by globalisation, the economy has been moving up the value chain, shifting towards higher
value added services and more knowledge-based activities. At the same time, the economic and financial
integration between Hong Kong and mainland China has been strengthening, creating greater business
opportunities for a wide range of services. Financial integration with the Mainland is expected to continue
to deepen going forward. The Shanghai-Hong Kong Stock Connect program, launched in November 2014,
has already given investors in the two cities access to each other's equity markets. A similar arrangement is
to be implemented for the Shenzhen stock exchange this year, which will further enhance co-operation
between Hong Kong and mainland China. In addition to banking and finance, Hong Kong's services sector
is another driver of the office market. The sector is among the most developed in East Asia, with insurance,
for example, having seen the fastest growth in recent years.
The dominance of the financial and business services sector is reflected in Hong Kong's mature, dynamic
and vibrant office market. Net absorption of around 300,000sq ft was recorded in the first quarter of 2015 in

Hong Kong Island, with banking and financial services occupiers the most active in committing to new
take-up of space.
Leasing and investment activities tend to be concentrated within several districts in Hong Kong Island. Key
office centres/districts are:
Central: The Central Business District (CBD) is where most of the newly completed Grade A buildings
is concentrated. It is also a preferred location for financial and banking institutions, hedge funds, legal
firms supporting the financial sector, and multi-national corporations.
Sheung Wan: The area situated just north-west of the core business district of Central. This area is more
popular with local businesses and is preferred by many as a cost effective alternative that is still in close
proximity to the Central.
Admiralty: Admiralty is another extension of Central, lying to the east it is the location of the High
Court and therefore the preferred location for legal firms.
Wan Chai / Causeway Bay: East of Admiralty, Wan Chai has undergone substantial redevelopment in
the last 20 years and houses many major government departments and international consulates. Causeway
Bay is mainly a retail centre, but has some office occupiers such as Google.
Island East: This comprises North Point and Quarry Bay, two areas that are attracting more tenants with
lower rents than in their neighbouring districts to the west. In Quarry Bay in particular, new office
towers and substantial urban planning improvements are taking place with newly built and future planned
Grade A office spaces within the Taikoo Place cluster. North Point is considered mainly as a residential
district, but has a limited supply of Grade A and B office buildings at attractive prices.
Overall, higher levels of occupier demand and take-up this year have benefited all sub-markets in Hong
Kong Island. Among those active this year has been the Commonwealth Bank of Australia, for example.
It leased two floors (25,000sq ft NFA) in One Exchange Square, Central. This was the second leasing by the
bank, who had previously taken one floor in the same building during Q4 2014. Other deals have included
the 5,070sq ft (NFA) taken by China Re Asset Management at Three Exchange Square.
The second phase of the Stock Connect Scheme, allowing direct trading between Hong Kong and Shenzhen
Stock Exchanges, will help to increase demand for office space and it is expected that new set-ups and
companies from mainland China will be among those who decide to establish their footprint in Hong Kong.
These are likely to be a key source of demand for office space particularly in Central and surrounding
districts.
As a result of higher demand, the overall vacancy rate for Grade A space is now a mere 3.6%. Although
vacancy rates are likely to come under further pressure in future months, more supply will also be delivered
to the market as new buildings that are currently under construction are completed. Among key schemes
under development in Hong Kong Island that are due to complete in 2015 are Tower 535 (Central Mansion

Redevelopment), Causeway (122,850sq ft); 10-12 Queen's Road Central, Central District (81,400sq ft) and
41 Heung Yip Road, Wang Chuk Hong (186,780sq ft). Longer term, the government is also expected to
release land with the potential to deliver around 4mn sq ft of office accommodation in Central and Wan
Chai through reclamation and the re-provisioning of old government buildings and car parks.
Away from Hong Kong Island, Kowloon, and in particular Kowloon East, is becoming increasingly popular
with occupiers as it offers higher availability of space at a discount. We expect this to continue going
forward. In Kowloon, tenant activity is focused on three broad districts:
Tsim Sha Tsui: Situated on the southernmost tip of Hong Kong's mainland, the area has become a
preferred choice for corporations, with business connections in Kowloon, New Territories and/or
mainland China given its good transport connectivity and its rail line to Shenzhen as well as the wide
variety of cost effective office buildings that it provides.
Kowloon West: This district is home to the tallest building in Hong Kong, the International Commerce
Centre (ICC), which was completed in 2010 and has since become a secondary financial centre with
leading multinational finance firms.
Kowloon East: Although historically an industrial area, Kowloon East is developing into an emerging
business district with very attractive rental rates relative to the core CBD of Central. The district is part of
government's plans for a 'CBD2', which comprises low cost housing, commercial and residential space, as
well as more green space and light railway. Current redevelopment here consists of shifting industrial
space to office. With Grade A rents at 30%-40% discount to Central and additional new office buildings
planned, Kowloon East is becoming an attractive up and coming area, providing new options both to
companies that need accommodation for back-office operations as well as to those that do not need to be
near the financial centre.
Around 800,000sq ft of space was taken in Kowloon in the first quarter of 2015 (latest available data). The
total vacancy rate in Kowloon East has fallen significantly in recent months and is currently around 4.9%.
We believe this will fall further as availability of space reduces in response to higher tenant demand. Cost
efficiency remains a key priority for larger institutions, especially multinationals, and the uncertain global
economic outlook and the slowdown in China's economy in particular is likely to encourage many to opt for
taking new space in cheaper locations. Therefore, over the next few years we can expect to see a greater
degree of decentralisation, in order to find more cost-effective alternatives, than has been the case in the
past.
It is interesting to note that there has been a sizeable contingency of insurance sector corporates, global
sourcing firms and engineering consultancies undergoing regional infrastructure projects that have
expanded into more decentralized locations. For example, the Kowloon Bay area is emerging as a popular
destination for multinational conglomerates looking to establish regional HQ's in Hong Kong. This may be
due to the reduced rental costs here that have been sought out by firms looking to reduce operating costs.
However, this has not drifted attention away from the dominant business areas as some prominent

developments such as 'The Center' and 'The Cheung Kong Center' witnessed occupancies rise to 98%,
allowing the owners Cheung Kong Property to marginally increase rentals as a result. Expansion plans by
China commercial banks will also contribute to reducing vacancies in such business locations, as
subsequent developments look to absorb available market space with projects boasting 20,000sq ft additions
to established units.
Among projects currently under construction in Kowloon and due to come on the market later this year are
56 Tsun Yip Street, Kowloon East (190,030sq ft); 8 Observatory Road, Tsim Sha Tsui (80,370sq ft) and at
One Bay East, Kowloon East (694,420sq ft). More development is expected in Kowloon East in the coming
years. Longer term, planned government land sales should bring fresh schemes and greater supply of space
to the market. Since 2011, the government has earmarked numerous land parcels for office development in
Kowloon East as part of the Energizing Kowloon East Office scheme. These sites have the potential to
provide millions of square feet of Grade A office stock. Furthermore, the development of the West
Kowloon Cultural District and the completion of the Guangzhou-Shenzhen-Hong Kong Express Rail Link
terminus should provide incentive to developers to build. The phasing and timing of delivery of these new
schemes will be critical if the office market is to avoid an over-supply in the longer term.
Table: Office Yields 2010-2019
2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Hong Kong Net Yield % 3 2-3.5 3.5-5 4-5 4-5 4-5 4-5 2-3 2-3 2-3
Hong Kong Yield Spread -2 -3--1.5 -1.5-0 -1-0 -1-0 -2.3--1.3 -3.5--2.5 -5.5-2.5 -5.5--4.5 -5.5--4.5
%
Hong Kong Interest Rate 5.0 5.0 5.0 5.0 5.0 6.3 7.5 7.5 7.5 7.5
(%)
Source: BMI
Net yields in Hong Kong have been stable over the past 18 months (from 2014 to mid 2015) at around
4%-5%, depending on the quality of assets. We believe these will remain at this level during the course of
this year and in 2016, but significant tightening is expected in 2017 to around 2%-3%, as the momentum in
the office market gathers pace in response to a stronger economy. Higher occupier demand as well as rental
growth over the next few years combined with strong investor demand for best quality assets will keep
yields under pressure.
Yield spreads are currently 2.3%-1.3%, depending on assets and the current level of interest rates. But the
gap between office yields and interest rates is forecast to widen over the next few years as interest rates

increase. Interest rates in Hong Kong are forecast to rise to 7.5% by the end of next year, in line with the
upward trend anticipated in US interest rates. This means that yield spreads will move out to 3.5%-2.5% in
2016 and to 5.5%-4.5% by 2019.
In our view the office market in Hong Kong offers significant opportunities to potential investors in the
medium term. The decline anticipated in yields should help to drive capital values upwards in the next two
years. This combined with rental growth should provide investors with healthy total returns. Furthermore,
the growth of the market, not just in Hong Kong Island, but also in Kowloon East where new construction
will be taking place, will give investors the opportunity, perhaps for the first time, to acquire high quality
assets in both established and emerging office locations. This will be a much welcome respite given the lack
of tradable stock currently characterising the Hong Kong investment market. That said, post 2017 a number
of risks should also be taken into account by investors. Firstly with yields at 2%-3%, the potential for
further yield reduction and hence growth in capital values is limited. Any capital growth over the period
2018-19 is likely to be driven entirely by uplift in rents. Secondly, more construction will mean higher
supply levels in the medium to long term and this could dampen rental growth by pushing up vacancy rates,
albeit from a low base.
Industry Forecast
BMI View: The flagship retail industry in Hong Kong took a tumble recently as the implications from a
significant drop in Chinese tourism and high retail operating costs plague the damaged industry. Vacancies
in high-street stores are expected to rise as demand dwindles for luxury goods and focus for investors
resides in large malls and department stores. We therefore opine a downward rental trend for 2016.
Hong Kong has retained a global reputation for its retail market that consists of significant mall
developments and substantial department complexes offering many high-end luxury goods. The
predominant theme has been the reliance on regional tourism, particularly Chinese, which constitute the
majority of the demographic that shop in the nation. After a prolonged period of strong performance in the
sector, recent pressures arising from HKD appreciation, destination preference for cost-effective markets
and the Chinese crackdown on the exchange of luxury goods between party members resulted in the broader
retail sector witnessing contractions that have influenced a more cautious view of the Hong Kong retail real
estate sector. However, although these aspects will impact the market negatively over the short-term, the
rising household spending figures and greater levels of regional private consumption offer hope for the
sector that could see rentals stabilise by mid-2016.

Total household spending represents a key indicator of domestic retail performance, and therefore
constitutes a primary concern for our industry forecast. We expect growth to average 6.7% for the
2016-2019 period, and subsequent opportunities to arise in the mid-term once the market stabilises and
demand for contemporary retail units grow.
Spending Levels To Drive Demand For Retail Space

total household spending HKDbn and % growth (2012-2019)
2,500 9
2,000 8
1,500 7
1,000 6
500 5
0 4
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Total household spending, HKDbn (LHS)
Total household spending, HKD % y-o-y (RHS)
BMI/Hong Kong Census and Statistics Department
A number of factors underpin this expected growth in spending. Firstly, as a city state Hong Kong has a
100% urbanisation rate. Secondly, Hong Kong has one of the largest and most prosperous middle class
households in Asia. The increasingly affluent population tend to purchase the most modern products, luxury
items and non-essential goods. Finally, the bulk of Hong Kong's spending originates from the 21-39
demographic. This category is characterised by high levels of employment and growing levels of disposable
income. The number of households within the USD50,000 plus income bracket is forecast to rise to 42% of
the population in 2019 (from 35.4% in 2015). This means higher spending power, which is good news for
retailers and in turn good news for the retail real estate market.
Net income per capita is forecast by BMI to see strong and steady growth over the next five years, rising
from HKD228,671.99 in 2015 to HKD287,685.59 by 2019. A strong economy and labour market in Hong

Kong supports this forecast. The rate of unemployment is currently 3.2% and is predicted to remain stable at
this level over the next five years. Although, it is important to note that the current situation in the retail
sector has led some establishments to vacate their property in order to maintain profitability and avoid
higher rental costs. This has directly contributed to unemployment levels, and any further contractions in the
retail sector could see this figure rise. Hence, it is imperative to consider this aspect when considering
acquisitions of retail real estate for long-term gains. Nevertheless, the rising incomes represent a buffer for
such an action and could see the impacts from such a situation reduced.
Affluence And Higher Purchasing Power Will Benefit Retailers

net income per capita HKD (2012-2019)
300,000
275,000
250,000
225,000
200,000
175,000
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Hong Kong - Net Income, per capita, HKD
BMI/Hong Kong Census and Statistics Department
Tourism has been a key driving force in the retail sector in recent years. Attracting millions of visitors a
year, Hong Kong is one of the world's top shopping destinations. Yet, while tourism will remain a
significant element in the retail sector, there are signs of a shift in the pattern of spending by Chinese
tourists not least because of anti-corruption measures introduced by the Chinese Government, which is
curbing spending by some tourists on expensive luxury items and is reducing their spending sprees. The
move towards buying more affordable products has meant that the amount of money spent by Chinese
tourists has been lower in recent months. This has been most evident at the luxury end of the retail sector,

with sales of watches, jewellery and other luxury items down compared to the recent past. This is not a
trend that is likely to be reversed in the medium term. The impact of the change in consumer attitude and
spending pattern will be felt through all segments of the retail sector and will therefore directly affect
retailers' space requirements.
Regardless of short term influences Hong Kong remains a dominant retail location among global cities as
well as one of the most expensive retail locations in the world in terms of rental costs. Maximum rental
costs currently stand at HKD4856.25/sq m (USD625.0/sq m). Minimum rents are HKD679.88/sq m
(USD87.50). Average rents have increased marginally over the period 2014-2015 and are CNY2768.06/sq
m at present. We believe that rental values will come under pressure during 2015 and into 2016 due to the
weaker tenant market.
Table: Retail Rental Rates 2010-2015
2010 2011 2012 2013 2014 2015
Hong 36.8 744.0 41.7 299.6 61.3 467.6 85.5 604.0 87.5 625.0 87.5 625.0
Kong
USD per
square
metre
Hong 285.9 5780.9 324.6 2330.9 475.7 3628.6 663.5 4687.0 678.1 4843.8 679.9 4856.3
Kong
HKD per
square
metre
Average 3033.4 - 1327.7 - 2052.1 - 2675.3 - 2760.9 - 2768.1 -
rent per
square
metre
(CNY)
% - - -56.2 - 54.6 - 30.4 - 3.2 - 0.3 -
growth
y-o-y
Source: BMI
There have been very few large leasing transactions in the first few months of 2015 and we believe the
market will remain quiet the short term. The general attitude amongst retailers at present is one of wait and
see. So, while there is little expansion, there is also few consolidations or downsizing as mentioned prior.
Lease renewals on a short-term basis (typically three to six months) are becoming more evident, especially
in core streets and among luxury goods retailers as the confidence of such establishments drops amid the

current market situation. Outside of the prime streets, where vacancy rates are lower, the pressure on rents is
more noticeable and landlords have lowered asking rents. There have also been a number of retailers asking
landlords for rental discounts, in an effort to reduce the implications from dwindling sales, a clear
representation of the dropping confidence from retailers, and bodes caution for new players looking to
develop or acquire retail units in the Hong Kong market.
We believe that the current state of the retail market is a reflection of the structural changes that are taking
place as the market adjusts to a different pattern of consumer behaviour. As retailers intensify their efforts
towards targeting and attracting domestic and local shoppers, the signs are positive for the medium term,
given the underlying strength of the economy and the continuing affluence of the population. The way and
the extent to which the real estate sector responds to these new challenges will ultimately determine its
performance over the next few years and therefore the degree of its attractiveness to investors.
Table: Retail Yields 2010-2019
2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Hong Kong Net Yield 4 1-3.5 1-5.5 3-5 3-5 3-5 3-5 2-3 2-3 2-3
%
Hong Kong Yield -1 -4--1.5 42120-0 -2-0 -2-0 -3.3--1.3 -4.5--2.5 -5.5-2.5 -5.5--4.5 -5.5--4.5
Spread %
Hong Kong Interest 5.0 5.0 5.0 5.0 5.0 6.3 7.5 7.5 7.5 7.5
Rate (%)
Source: BMI
Net yields for retail properties in Hong Kong are higher than a couple of years ago due to a softer retail
estate market, but are still very low. At present best quality assets command a net yield of 3.0%, whilst
yields on lower grade properties are about 200bp higher at 5.0%. We do not anticipate a change in these
until 2017. Thereafter, we envisage a reduction in net yields to 2.0%-3.0% depending on the quality of
assets. Yield spreads are currently at 3.3%-1.3%. BMI forecast that these will move out to 4.5%-2.5% next
year and to 5.5%-4.5% by the end of the forecast period, reflecting the higher level of interest rates
anticipated as economic growth accelerates.
We believe that the retail market provides favourable opportunities for investment in the medium term. As a
renowned retail destination, Hong Kong is likely to remain popular with both retailers and shoppers. There
is potential for capital growth in 2016-2017as yields shift down. Thereafter, rental growth is likely to be the

main driver of any growth in capital values. Vacancy rates for shopping malls and department stores are
likely to remain lower than for street level shops, and therefore retain greater potential for rental growth.
Industry Forecast
BMI View: Efforts by the Hong Kong government to 'reindustrialise' the economy and wean dependence off
financial services should aid development in the sector in the long term. Warehousing looks to provide
further opportunity for investors in the medium-term, as greater private consumption will support demand
from retailers for this particular space in a limited market. Hence, we opine there may be marginal rental
trend as a result over 2016.
Hong Kong has a considerable trade sector, comprising around 20% of GDP, consisting predominately of
warehousing, logistics and distribution centres. The sector is an important component of the economy, and
as the nation retains an open door policy and a favourable transparent business environment, it has become
one of the leading global trading economies. It is important to note that trade dynamics are heavily reliant
on external demand with the global economy, and more so with regional trade partners such as China, Japan
and Singapore. This therefore leaves the economy vulnerable to external headwinds such as the Greece
financial crisis and the China economic slowdown, which have negative implications for trade.
Manufacturing and trade constitute the key demand drivers within the Asian Tiger economy for industrial
real estate space, and as the Hong Kong government announced in Q3 2015 that the constituency is
undergoing efforts towards reindustrialisation, we view a larger proportion of the industrial sector being
targeted towards more modern industries. Furthermore, Hong Kong retains one of the largest airports by
cargo handled in the world, and the fourth-largest container port facility. The presence of which should
sustain interest into the economy from foreign companies, especially in the wake of the growing e-
commerce industry that has exponentially grown in areas such as Hong Kong as a result of its effective
technological infrastructure.
Growth in trade flows slowed in 2015 as a result of the dampened regional demand, largely influenced by
the China economic slowdown and appreciation in HKD affecting ability for exporters to remain
competitive. Looking ahead, 2016 corporate focus will primarily revolve around demand for warehousing,
as the budding online retail industry will support demand for this particular space. Post-2016 should witness
growing demand from institutions looking to invest in more modern facilities, such as robotics, biomedical
and pharmaceutical manufacturing, as the government continues with the diversification of the economy
through reindustrialisation. Overall, these factors should support the growing trade flows forecasted for the
industrial sector, and see rentals rise gradually over the next few years as limited supply and good demand
sustain.

Trade Flows Drive Demand For Warehouse Space

imports and exports USDbn (2012-2019)
1,500
1,000
500
0
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Goods imports, USDbn Goods exports, USDbn
BMI/Census and Statistics Department
The manufacturing sector is expected to see growth in output of 3.0% per annum over the period 2015-19,
in response to higher business confidence and investment and a pick-up in domestic demand. This is double
the annual rate of growth achieved in the period 2010-15. This rise in industrial production should help to
drive the need for more warehouse space. One additional factor, which will play an increasingly important
part in determining the strength of demand for warehouse space over the next few years, is the growth of e-
commerce. This is a key growth area in Hong Kong and as in many other developed and developing
economies e-commerce and m-commerce are both growing fast. The implication for the industrial market is
likely to be higher requirements by retailers (including food retailers in the MGR sector) for warehouse and
distribution space, in order to facilitate and meet this rising level of consumer demand.
Another important topic in the manufacturing sector, as mentioned prior, is the efforts by Hong Kong to
'rejuvenate' industrial real estate in order to make it more appealing to contemporary forms of
manufacturing. This would look to bring in 'high-value' cliental from industries such as pharmaceuticals and
robotics. These facilities would look to adopt modern science and technology in order to abstain from
labour-intensive production and therefore create new job opportunities and new industries up to the 'first

phase' target of 2020. This looks to support the growth in the sector and should buoyant rentals in the long-
term as a result, owing to the limited supply of suitable industrial parks and rising demand for these outlets.
Growth In Manufacturing Production Will Increase Demand For Distribution

Space
manufacturing GVA HKDbn and % growth (2012-2019)
40 4
30
2
20
0
10
0 -2
2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Manufacturing nominal GVA, HKDbn (LHS)
Manufacturing HKD nominal GVA growth, % y-o-y (RHS)
BMI/UN
Considering the disposition of the established infrastructure in Hong Kong catered towards the financial and
retail industries, it has meant that even though there is an abundance of suitable tech innovation within the
nation, those firms are finding it hard to form a foundation to develop a business. This applies to the
emerging manufacturing in particular and looks to constrain the ability for the sector to perform in the short-
term. Therefore, growth in the industrial real estate sector for the time being will mostly reside in
warehousing.
The highest concentration of warehouse space is in Kwai Tsing/Tsuen Wan. Close to the container
terminals in Kwai Chung and Tsing Yi, as well as strategically linked to Hong Kong International Airport
via Tsing Ma Bridge, the area provides a cluster of logistics operators and accounts for over half of Hong
Kong's warehouse space and just over a third of the factory stock. Sha Tin is also an industrial location
providing around 12% of Hong Kong's warehouse stock as well as around 7% of factory stock. There are

also some industrial stock in other locations such as Tsuen Mun, and Kwun Tong, but the concentration of
warehouse stock in these locations is much less (between 4%-7%)
Industrial rental costs in Hong Kong are currently at HKD 271.95/sq m (USD37.50/sq m) for high quality
space. Minimum rents are HKD93.30/sq m (USD12.50/sq m). The trend shows stability in both minimum
and maximum rents during the past year. Average rents are CNY184.54/sq m. This is marginally higher
(0.26%) than in 2014.
Table: Industrial Rental Rates 2010-2015
2010 2011 2012 2013 2014 2015
Hong Kong USD 3.00 18.90 3.90 14.70 6.70 24.90 11.40 35.90 12.50 35.00 12.50 35.00
per square
metre
Hong Kong 23.31 146.85 30.34 114.37 51.99 193.22 88.46 278.58 96.88 271.25 97.13 271.95
HKD per square
metre
Average rent 85.08 - 72.35 - 122.61 - 183.52 - 184.06 - 184.54 -
per square
metre (CNY)
% growth y-o-y - - -14.96 - 69.46 - 49.68 - 0.29 - 0.26 -
Source: BMI
During the first half of 2015 rental values have been supported by limited supply and we expect this to
continue during the remainder of 2015 and into 2016. Occupier demand for prime warehouse space has
been more subdued in recent months partly due lower demand from third party logistics companies and
partly due to the weaker retail market, which has made retailers more cautious towards expansion, and
consequently less active in leasing warehouse space.
Among key warehouse transactions in 2015 have been the take-up of 101,760sq ft at Hutchison Logistics
Centre, Kwai Chung; 48,800sq ft leased at Asia Logistics Hub - SF Centre, Tsing Yi; 41,900sq ft leased at
Global Gateway (HK), Tsuen Wan and 22,000sq ft taken up at MTL Logistics Centre, Kwai Chung.

Over the past few months there has been a rising trend towards buying of industrial buildings for conversion
to office space. This is likely to continue in the run up to the expiry of the government led revitalisation
policy in March 2016 and will reduce the volume of industrial stock in the coming months
Competition for industrial land is fierce and supply is scarce and is likely to remain so in the short term.
In the medium term, we believe there will be greater demand for warehouse space as logistics operators
continue to consolidate their operations under one roof in prime locations in order to improve their
operational efficiency. The anticipated recovery in the consumer sector over the next five year should also
encourage greater take-up of storage and warehouse space from retailers.
Table: Industrial Yields 2010-2019
2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f
Hong Kong Net Yield 4 2-3.5 1-4 1-5 1-5 1-5 1-5 2-10 7-10 7-10
%
Hong Kong Yield -1 -3--1.5 -4--1 -4-0 -4-0 -5.3--1.3 -6.5--2.5 -5.5-2.5 -0.5-2.5 -0.5-2.5
Spread %
Hong Kong Interest 5.0 5.0 5.0 5.0 5.0 6.3 7.5 7.5 7.5 7.5
Rate (%)
Source: BMI
In the investment market net yields stand at 1%-5% at present, depending on the quality of assets. BMI are
forecasting a stable profile for yields during the remainder of this year and in 2016, but an outward shift in
yields to 2%-10% in 2017, before they hold steady throughout the rest of the forecast period. Yield spreads
are currently at 5.3%-1.3%. These are forecast to widen next year to 6.5%-2.5%, before the gap narrows
once again in 2017 to 5.5%-2.5% as interest rates rise.
Competition among investors to purchase scarce land as well as en-bloc assets is currently high. With more
conversion of industrial properties into office accommodation expected, this should ensure that some of the
older and single owned industrial properties remain highly sought after by both local and institutional
investors. Purchase of buildings for owner occupation and self-use should also increase. Overall, an
improvement in demand and healthy prospects for rental growth in the medium term should offer investors
interesting opportunities in the warehousing market in Hong Kong.

Residential/Non-Residential Construction - Outlook And Overview
Table: Residential and Non-Residential Building Industry Data (Hong Kong 2013-2018)
2013 2014 2015f 2016f 2017f 2018f
Residential and Non-residential Building Industry Value As % of Total 50.10 52.49 51.00 49.61 48.82 48.38
Construction
Residential and Non-residential Building Industry Value, HKDbn 41.73 40.79 43.08 44.95 46.69 48.37
Residential and Non-residential Building Industry Value, USDbn 5.38 5.26 5.54 5.78 6.01 6.22
Residential and Non-residential Building Industry Value Real Growth (%) -4.32 -6.64 1.41 1.08 0.88 0.59
Residential and Non-residential Building Industry Value as % of GDP 1.96 1.82 1.79 1.75 1.71 1.67
f = BMI forecast. Source: Statistics Hong Kong
Table: Residential and Non-Residential Building Industry Data (Hong Kong 2019-2024)
2019f 2020f 2021f 2022f 2023f 2024f
Residential and Non-residential Building Industry Value As % of Total 47.70 47.44 47.25 47.12 47.03 47.00
Construction
Residential and Non-residential Building Industry Value, HKDbn 50.42 52.35 54.42 56.63 58.98 61.49
Residential and Non-residential Building Industry Value, USDbn 6.49 6.74 7.00 7.29 7.59 7.91
Residential and Non-residential Building Industry Value Real Growth (%) 0.74 0.83 0.95 1.06 1.16 1.25
Residential and Non-residential Building Industry Value as % of GDP 1.63 1.60 1.56 1.53 1.49 1.46
f = BMI forecast. Source: Statistics Hong Kong

Modest Recovery
Residential And Non-Residential Building Industry Value (2013-2019)
60 2.5
0
40
-2.5
20
-5
0 -7.5
2013 2014 2015f 2016f 2017f 2018f 2019f
Residential and Non-residential Building Industry Value, HKDbn (LHS)
Residential and Non-residential Building Industry Value Real Growth (%) (RHS)
f = BMI forecast. Source: Statistics Hong Kong, BMI
We remain optimistic about Hong Kong's residential and non-residential construction sector over the
medium term (2015-2019). We are forecasting Hong Kong's residential and non-residential building sector
to experience growth of around 1.8% in 2015 and then for growth to slow to 0.7% in 2019.
This is because the housing bubble is being defused by huge quantities of new land for residential
development. In addition, Hong Kong's close economic ties with China and its push to address the needs of
its ageing population is spurring growth in the non-residential building sector. Having said that, the threat of
a deep economic slowdown in China could ultimately derail the prospects for growth in the non-residential
building sector.

Residential Building
Since 2010, the Hong Kong government has been concerned about its housing bubble. Between 2010 and
March 2013, the government launched no less than six rounds of cooling measures to curb property prices,
with the most recent round taking place at the end of February 2013 - beginning February 23 2013, buyers
of property valued below HKD2mn will incur a 1.5% stamp duty, while properties valued above this
threshold will see a doubling of the levy to as much as 8.5%. First-time local and permanent resident
homeowners will be exempt from these measures.
One of the major measures to defuse the country's housing bubble is the release of huge quantities of new
land to boost housing supply. We have noticed this trend since 2012. During the 2012/13 budget
announcement, there were not only new guidelines that were aimed at hastening the approval of permits for
private projects sales, but also the release of 47 residential sites to be placed under the government's
2012-13 Land Sale Programme. This trend has continued in 2013. During the 2013/14 budget
announcement, the government announced that 46 residential sites (28 of them new sites) would be
included under its 2013-2014 Land Sale Programme to build a total of 13,600 residential units. The
government also announced that it would provide enough land to build 79,000 public rental housing flats
between 2012 and 2016, and about 17,000 Home Ownership Scheme flats between 2016 and 2019.
The growth in land supply has prompted the government to design Hong Kong's first new long-term
housing strategy in 14 years. To ensure that the new-builds will find be taken up by the middle-income
strata, a committee is mooting price-control measures such as taxes and restrictions on loans to non-locals
for second homes. Such developments assure us that the huge new supply will be priced to sufficiently meet
local demand, stimulating the continuation of further residential construction.
A sizeable portion of the allocated land has already been awarded to developers - the value of real estate
transactions in Hong Kong peaked in March 2012 - and this has translated to construction activity.
In addition, the strong pipelines of major players Chueng Kong and Sun Hung Kai Property will
guarantee that the non-residential sector experiences a steady rate of growth over the following quarters. In
August 2012, Cheung Kong won a USD1.24bn land tender to build a new residential and commercial
complex above the Tsuen Wan West MTR station on the condition that the housing developed be
affordable. Both firms have announced that they intend to continue bidding on new land.

Sky-High
Hong Kong Property Price Index, By Region (1999 = 100)
Source: BMI, Rating and Valuation Department
However, despite the property curbing measures, the increase in housing supply, stagnant wage growth and
the growing risks of the US Federal Reserve raising interest rates earlier than expected have meant property
prices in Hong Kong continue to remain at close to record highs. This is because the fundamental factors
driving prices in Hong Kong real estate are still present. They are:
A low interest rate environment and readily available cheap credit. Negative real deposit rates and the
positive carry from mass market residential units remain a key attraction for property buyers. The main
reason for these congenial monetary conditions is the launch of a third round of quantitative easing by the
US Federal Reserve. Hong Kong's currency peg to the US dollar will mean that, regardless of other
measures being taken, officials will have to keep interest rates in line with those set by the Federal
Reserve - and, according to Ben Bernanke, these will remain capped. This means that borrowing costs in
Hong Kong will remain low.
A relatively healthy labour market. The unemployment rate was at a decade low in 2012, while income
growth remained relatively robust. We expect Hong Kong's labour market to remain resilient, which in
turn will continue to support purchasing demand.
Extremely tight housing supply. Even though the government has made material efforts to ramp up land
supply, actual housing supply is expected to only come online towards the end of 2014. This
consequently means that the Hong Kong's tight housing supply situation will continue to provide
supportive pressure for prices in the near term.

Renewed interest from Chinese buyers. We believe that cross-border mainland buyers, who have
remained relatively apprehensive as a result of the property curbs and the domestic leadership transition,
are unlikely to remain on the sidelines for much longer. Chinese buyers typically view the Hong Kong
property market to be a more attractive investment relative to the mainland given its political autonomy,
proximity to the mainland, independent institutions, international exposure and fundamental land
constrictions. Once the initial knee-jerk reaction to the recent property curbs start to abate, Chinese
buyers, who are also likely to be buoyed by the cyclical upturn in China, are likely to return to the
market.
Setbacks in rezoning and town planning efforts. Latest statistics from the Land Department show that the
government has released enough land to build 8,200 flats in the first three quarters of 2013, with just
another 3,300 flats potentially launched in Q413. This means that the government may only be able to
meet 84% of its land sales target for 2014, reducing the potential number of residential building projects
for construction over the near term. According to the government, the delays in land releases are
primarily due to setbacks in rezoning and town planning efforts.
Behind Schedule
Hong Kong - Number Of Building Works Approvals
Source: BMI, Buildings Department
Despite the aforementioned factors, we are of the belief that residential property prices remain considerably
overvalued and we are not abandoning our view of a correction in the property market.
Housing unaffordability appears to be worsening, as the price-to-income ratio stood at 17.6 in 2012,
according to a Knight Frank report. Given the rising levels of social discontent, the government is likely to

keep a keen eye on further escalations in real estate prices, which suggests that further tightening measures
are unlikely to be out of the picture. Additionally, once housing supply comes online, we can expect the
upward pressure on prices to ease considerably. The timing of the release of new units will be crucial, given
that another pertinent risk stems from the normalization in the interest rate cycle. With the supply situation
likely to be alleviated in 2014 and the next upcycle in interest rate likely to begin in 2015, these two factors
could combine to have severe adverse implications on the property market with some analysts estimating
that the housing prices could decline as much as 30% in 2015. According to the local media house prices
stabilised in March 2015 following 11 months of consecutive rises. Finally, as we had suspected, China's
growth bounce has proven superficial, as the structural deficiencies within the Chinese economy (shaky
financial system, overvalued property market, expensive infrastructure build-up and huge industrial
overcapacity) have begun to flare up. Latest economic data on China is providing evidence that the
mainland economy is on course for a growth relapse and a deep economic slowdown in China could lead to
a decline in Chinese buyers for Hong Kong real estate owing to restrictive purchasing power.
As a result of the government's measures, residential transactions declined 56% in 2013 compared to 2012
to reach a 23-year low. If this continues into a sustained decline in housing demand, developers could be
deterred from carrying out new residential building projects. Anecdotal evidence also suggests that local
property buyers, deterred by the hefty transactional fees, have set their sights on overseas markets. That
said, some respite could be had as the government announced the lifting of the double stamp duty that was
implemented in early 2014, which could reignite transactional activity.
Non-Residential Building
We are also relatively optimistic about non-residential building activity in Hong Kong. This is owing to its
close ties with China. Hong Kong's main source of tourist arrivals is from China (around 60%) and it is a
major gateway for foreign businesses looking to enter into the Chinese market. To maintain its status
against fast-rising Chinese cities, the government needs to remain committed in developing the city-state's
commercial areas. We have seen this commitment in 2012 and 2013. The 2012-13 Land Sale Programme
saw the government release four commercial/business sites and two hotel sites for development, while the
2013-14 Land Sale Programme includes nine commercial/business sites and one hotel site. The government
also announced in March 2013 that it will expedite the development of the Kowloon East core business
district, which, upon completion, could provide an office floor area of 4mn m. The demand for office space
in Hong Kong's Central Business District (CBD) is so huge that it is propelled to relocate government
departments from the CBD to release more office space to the market.

Having said that, the threat of a deep economic slowdown in China could weigh on growth in the non-
residential building sector. Indeed, according to the most recent figures from Hong Kong statistics office
private sector construction works declined 0.8% in 2014 compared to the previous year.
Social Infrastructure
Another reason for our optimistic outlook for Hong Kong's non-residential building sector is its push to
address the needs of its ageing population. Hong Kong's population is ageing rapidly, with the working-age
population estimated to begin falling as early as 2016. As such, there is a growing need for healthcare
facilities, and the government is implementing plans to meet these needs. In the 2015/16 budget, Hong
Kong Financial Secretary John Tsang unveiled a generous budget, allocating HKD49bn to the Hospital
Authority, which, according to him has risen by 50% over the past five years. Hospital construction projects
worth HKD81bn will go towards accommodation facilities that will be able to house 2,800 beds. At the top
of the list is an acute general hospital in the Kak Tai Development Area that will house 800 beds and be
completed by 2021.
In addition to project opportunities from the government, there are also opportunities from the private
sector. In March 2013, GHK Hospital, a subsidiary of Malaysia's IHH Healthcare, announced that it was
developing a HKD5bn private hospital in Wong Chuk Hang. The project is due to be completed in 2016.

Table: Hong Kong Key Projects: Construction And Social Infrastructure
Value End
Project Name Sector (USDmn) Size Unit Companies Date Status Select
Cheung Fai
Building
Transformation
Project, Cheung Gaw Capital Partners[Operator]
Sha Wan, New Commercial square {Hong Kong}, MVRDV[Design/ Under
Kowloon Construction - 18,000 metres Architect]{Netherlands} 2015 construction
Sweett Group[Consultant/
Project Management]{United
Kingdom}, West Kowloon
Cultural District
Authority[Operator]{Hong
Kong}, Mott
MacDonald[Construction]
{United Kingdom}, Ronald Lu &
Partners[Design/Architect]
West Kowloon {Hong Kong}, Foster &
Cultural District Commercial square Partners[Design/Architect] At planning
project Construction - 400,000 metres {United Kingdom} 2026 stage
Architectural Services
Department[Operator]{Hong
Kong}, Bouygues S.A.
Hong Kong [Construction]{France},
Trade and Dragages Hong
Industry Tower, Kong[Construction]{Hong
Kai Tak Kong}, Wong Tung &
Development Commercial square Partners[Design/Architect]
Area (KTDA) Construction 262 8,276 metres {Hong Kong} 2015 Completed
China Communications
Construction Company (CCCC)
[Construction]{China}, Arup
Engineering firm[Construction]
{United Kingdom}, CIMIC
Group (formerly Leighton
Holdings)[Construction]
{Australia}, Chun Wo
Development Holdings of Hong
Kong[Construction]{Hong
Hong Kong Kong}, AECOM[Consultant/
Boundary Project Management]{United
Crossing States}, Jiangsu Intellitrans
Facilities, Company Limited-
HongKong- JSI[Equipment]{China}, Autotoll
Zhuhai-Macao Commercial square Limited[Equipment]{Hong Under
Bridge Construction 3,919 1,300,000 metres Kong} 2016 construction
West Kowloon Cultural District
Kong}, Bing Thom
Xiqu Centre, Architects[Design/Architect]
West Kowloon {Canada}, Ronald Lu &
Cultural District Commercial Partners[Design/Architect] Under
Project Construction - - - {Hong Kong} - construction
Kong}, Arup Engineering
M+ Museum, firm[Design/Architect]{United
West Kowloon Kingdom}, Herzog & de
Cultural District Commercial Mueron[Design/Architect] Under
Project Construction - - - {Switzerland}, Terry Farrell and 2018 construction

Hong Kong Key Projects: Construction And Social Infrastructure - Continued
Value End
Partners[Design/Architect]
{United Kingdom}
Arts Pavilion, Kong}, JET Architecture
West Kowloon Inc[Design/Architect]{Canada},
Cultural District Commercial VPANG Architects Ltd[Design/ Under
Project Construction - - - Architect]{Hong Kong} 2016 construction
Kong}, Ronald Lu &
Lyric Theatre, Partners[Design/Architect]
West Kowloon {Hong Kong}, Foster &
Cultural District Commercial Partners[Design/Architect] At planning
Project Construction - - - {United Kingdom} - stage
Warnes Associates Co.
[Construction]{Thailand},
Architects 49 Limited[Design/
Architect]{Thailand}, Sweett
Group[Consultant/Project
Amara Hotel, Management]{United
Surawong, Commercial Kingdom}, Amara Hotels &
Bangkok Construction - 250 units Resorts[Operator]{Singapore} 2015 Completed
Lai Sun Development[Operator]
{Hong Kong}, Sweett
Group[Consultant/Project
Hong Kong Management]{United
Ocean Park Kingdom}, Aedas
Marriott Hotel Commercial Architects[Design/Architect] At planning
project Construction - - - {United Kingdom} - stage
Ocean Park's Tai
Shue Wan Feasibility
Development Commercial Sweett Group[Design/ studies/EIA
Project Construction 295 - - Architect]{United Kingdom} 2017 underway
Caritas Institute
of Higher
Education (TKO Sweett Group[Consultant/
Campus), Tseung square Project Management]{United At planning
Kwan O town Education - 7,500 metres Kingdom} 2016 stage
Mott MacDonald[Consultant/
Wellness Centre, Project Management]{United
Yan Chai Kingdom}, Sweett
Hospital, Hong Group[Consultant/Project Under
Kong Healthcare - - - Management]{United Kingdom} 2015 construction
Chinese
Medicine
Teaching
Hospital, Hong Kong Baptist University At planning
Kowloon Tung Healthcare 102 22 beds (HKBU)[Operator]{Hong Kong} 2020 stage
Gleneagles Hong
Kong Hospital IHH Healthcare[Operator]
(The Wong Chuk {Malaysia}, Gleneagles Hong
Hang Private Kong Hospital[Operator]{Hong Under
Hospital) Project Healthcare 643 500 beds Kong} 2017 construction
Caritas Medical Sweett Group[Consultant/ Under
Centre Healthcare 219 260 beds Project Management]{United - construction

Hong Kong Key Projects: Construction And Social Infrastructure - Continued
Value End
Kingdom}, Government of
Redevelopment Hong Kong[Sponsor]{Hong
Project - Phase II Kong}
Hong Kong
Buddhist
Hospital
Refurbishment Government of Hong At planning
Project, Kowloon Healthcare - 130 beds Kong[Sponsor]{Hong Kong} 2017 stage
Shui On
Construction[Construction]
Centre of {Hong Kong}, Government of
Excellence, Hong Kong[Sponsor]{Hong
Paediatrics, Kai Kong}, China State
Tak Construction Engineering
Development, Corporation (CSCEC) Under
Kowloon Healthcare 1,173 468 beds [Construction]{China} 2017 construction
Queen Mary
Hospital Hospital Authority of Hong
redevelopment Kong[Operator]{Hong Kong}, Feasibility
Project, Pok Fu Government of Hong studies/EIA
Lam Healthcare - - - Kong[Sponsor]{Hong Kong} 2023 underway
Hospital Authority of Hong
Kong[Operator]{Hong Kong},
Parsons
Brinckerhoff[Construction]
{United States},
Kwong Wah AECOM[Consultant/Project
Hospital Management]{United States},
Redevelopment WSP Group[Consultant/Project Under
Project, Kowloon Healthcare - - - Management]{Canada} 2022 construction
Sweett Group[Consultant/
Project Management]{United
Kingdom},
United Christian AECOM[Construction]{United
Hospital States}, Parsons
Redevelopment Brinckerhoff[Consultant/Project Under
Project, Kowloon Healthcare 1,032 300 beds Management]{United States} 2021 construction
Architectural Services
Department[Operator]{Hong
Kong}, Able
Tin Shui Wai Engineering[Construction]
Hospital Project, {United States}, Leighton Under
Yuen Long Healthcare 503 260 beds Asia[Construction]{Hong Kong} 2016 construction
AECOM[Construction]{United
Organic Waste States}, ATAL Engineering
Treatment Ltd[Construction], Suez
Facilities, Siu Ho Industrial '000 Environnement[Construction] Contract
Wan, Lantau Construction 197 200 tonnes {France} 2016 Awarded
Balfour Beatty[Construction]
Tsuen Wan {United Kingdom}, Gammon
Residential Residential Construction[Construction] Contract
Project Construction 413 900 units {Hong Kong} 2018 Awarded
Source: BMI Projects Database

Macroeconomic Forecasts
Economic Analysis
BMI View: Hong Kong's real GDP growth slowed to 2.1% year-on-year (y-o-y) in Q115, and we believe
that potential for a considerable acceleration over the near-to-medium term is limited. As a result of the
ongoing slowdown in China, an impending property price correction, and high levels of leverage, we have
downgraded our long-term (2015-2024) real GDP growth forecast for Hong Kong to an average of 3.2%
per annum, from 3.6% previously.
Hong Kong real GDP growth slowed to 2.1% year-on-year (y-o-y) in Q115, versus a rate of 2.4% in Q414.
The most noticeable slowdown in the quarter came in the private consumption category, where real growth
fell to 3.5% y-o-y versus a rate of 4.1% in Q414. Private consumption growth in Hong Kong has been
constrained by relatively high domestic inflation (driven largely by the continued run-up in property prices)
along with the ongoing slowdown in the Chinese economy, which expanded at its slowest pace since the
global financial crisis in Q115 (7.0%).
China Dominates Trade Flows

Hong Kong - Exports to & Imports from China, % total
Source: BMI, Censtatd

Export growth also fell marginally in Q115, declining to a 0.4% year-on-year (y-o-y) pace from 0.6%
previously. While the change in the growth rate was minimal, trade accounts have a disproportionately large
effect on Hong Kong's overall economic growth performance given the city-state's extremely high level of
trade exposure (with exports accounting for 220.7% of GDP in 2014). Even more so than domestic
consumption, Hong Kong's trade performance is inextricably tied to China's economic outlook. In 2014,
53.2% of Hong Kong's total exports were re-exports to China, reflecting the special autonomous region's
(SAR) extremely high level of dependence upon Chinese demand. At the same time, approximately 15.0%
of Chinese exports are sent to Hong Kong, the vast majority of which are re-exported. As such, both Hong
Kong's export and import outlooks are dominated by Chinese trade flows.
As we wrote recently (see 'Data Deluge Points Towards Further Weakening In Q215', May 14 2015), the
Chinese economy appears to have lost further momentum so far in Q215, as indicated by falling fixed asset
investment growth, a continued correction in property prices, and poor purchasing managers' index (PMI)
returns. Imports into the mainland have been particularly weak, contracting by 17.3% y-o-y over the first
four months of the year versus the same period in 2014. While Hong Kong's exports were able to post a
small expansion in both nominal and real terms in Q115, China's trade outlook that there is further to go in
the deterioration of Hong Kong's trade accounts over the near-term.

Property Prices Still Flying Against All Odds

Hong Kong - Private Property Price Index (LHS) & % chg y-o-y
Source: BMI, Censtatd
Casting A Wary Eye Towards Property Market, Debt Metrics
Domestically, the Hong Kong economy's outlook is similarly downbeat. The country's red-hot property
market has yet to enter a meaningful correction (despite a short period of shallow y-o-y declines in Q114),
and remains among the last major markets in Asia to continue to post consistent gains. Even in the midst of
a broad property price correction in China which has seen y-o-y decreases in prices across all city tiers, and
despite increasingly strict regulations from the Hong Kong Monetary Authority (HKMA), private
residential property prices have continued to rise in Hong Kong over recent quarters (see 'HKMA In
Tightening Mode As House Prices Surge Anew', April 22 2015). In March, private residential property
prices rose at a blistering 21.6% y-o-y pace, the fastest rate of increase since March 2013.
Property Prices In Line For Correction Despite Supply Woes
To be sure, Hong Kong continues to suffer from a significant shortage of housing supply. According to
government statistics, there are 260,000 families in the small island-state waiting to take advantage of the

government's public rental housing (PRH) scheme, and recent application rounds for its Home Ownership
Scheme (HOS) have been up to ten times oversubscribed. The completion of both public and private
housing units has underwhelmed targets and expectations thus far, which is likely to be one of the key
drivers of the recent leg up in price levels.
However, with affordability levels among the lowest in the developed world and significant new supply set
to come onto the market over the next two years, we believe that the question of a residential property price
correction is more of a question of when rather than if. The real estate sector forms a key pillar of Hong
Kong's economy, which does not have a considerable manufacturing base and relies more heavily on the
financial services sector than regional peer Singapore. While we believe that the current shortage of supply
will prevent an acute correction from taking place, we nevertheless believe that a steeper fall in prices than
that seen in early 2014 is highly likely.
Leveraging Up
Asia - Change In Private Sector Indebtedness Between 2007-2014, % of GDP
Source: BMI, IMF

Rapid Leveraging Suggests Little Room For Acceleration
A property price correction would add downward pressure on the massive financial services sector by
undermining loan growth and potentially hitting asset quality at the margin. This effect is likely to be
compounded by the extremely rapid run-up in overall debt in Hong Kong since the global financial crisis.
According to IMF figures, Hong Kong's nonfinancial corporate sector debt as a proportion of GDP
expanded by 93 percentage points (pps) between 2007 and 2014, while household indebtedness grew by
another 14pp. Such a rapid run-up in leverage is nearly always followed by a slowdown in not only
financial sector activity but also in broader economic growth. In tandem with our expectations for the
mainland Chinese economy to continue to slow over the coming years, this we find that overall economic
growth momentum is unlikely to pick up considerably over the medium term. As such, we retain our
forecast for real GDP growth to come in at 2.7% in 2015, and have downgraded our long-term growth
(through 2024) to an average of 3.2% per annum, from 3.6% previously.
Table: Economic Activity (Hong Kong 2010-2019)
2010 2011e 2012e 2013e 2014e 2015f 2016f 2017f 2018f 2019f
Nominal GDP, USDbn 228.7 248.7 262.6 274.8 289.6 309.4 330.0 352.3 376.1 402.3
Real GDP growth, % y-o-y 6.3 4.7 1.7 2.9 2.3 2.7 3.3 3.6 3.6 3.9
GDP per capita, USD 32,442 35,048 36,735 38,151 39,889 42,300 44,812 47,520 50,411 53,604
Population, mn 7.0 7.1 7.1 7.2 7.3 7.3 7.4 7.4 7.5 7.5
Industrial production, % y-o-y, 3.3 0.7 0.2 1.2 -3.4 -2.9 -0.5 1.0 2.5 1.5
ave
Unemployment, % of labour 3.7 3.1 3.1 3.1 3.8 3.8 3.8 3.8 3.8 3.8
force, eop
National Sources/BMI

Industry Risk Reward Index

Hong Kong Risk/Reward Index
BMI View: Hong Kong resides at the top of our list with 79.1 for Asia real estate risk and rewards owing to
the stable economic and political environment here. Tensions may arise with mainland China; however the
Shenzhen-Hong Kong co-operation looks to alleviate any issues and promote a more stable economy.
Longer term views on the nation are promising, as the ephemeral headwinds subside and the strong
fundamentals allow for greater growth in the Asian Tiger nation.
Table: Asia Real Estate Risk Reward Index
Industry Country Rewards Industry Country risks Risks Real estate Rank
rewards rewards risks score
Hong Kong 65.0 89.7 73.6 85.0 83.8 84.6 79.1 1
South 72.5 68.7 71.2 85.0 77.1 82.2 76.7 2
Korea
China 87.5 45.4 72.8 90.0 60.5 79.7 76.2 3
Taiwan 70.0 70.0 70.0 75.0 75.9 75.3 72.6 4
Singapore 65.0 89.9 73.7 60.0 89.7 70.4 72.1 5
Thailand 60.0 44.6 54.6 100.0 62.9 87.0 70.8 6
Japan 45.0 81.2 57.7 75.0 79.0 76.4 67.0 7
Indonesia 72.5 49.1 64.3 80.0 50.0 69.5 66.9 8
Malaysia 60.0 62.9 61.0 70.0 76.7 72.4 66.7 9
India 85.0 38.1 68.6 70.0 40.5 59.7 64.1 10
Australia 45.0 83.2 58.4 60.0 85.9 69.1 63.7 11
Philippines 65.0 40.3 56.3 75.0 53.6 67.5 61.9 12
Vietnam 60.0 32.6 50.4 80.0 46.5 68.3 59.4 13
Pakistan 50.0 36.7 45.4 60.0 35.6 51.5 48.4 14
Source: BMI
Rewards
Industry Rewards
The industry rewards score for Hong Kong is 65.0 out of 100, lower than in some of the competing
countries like Indonesia and Taiwan. This is due to a weaker industrial and retail real estate sectors in Hong

Kong caused by lower Chinese economic growth, trade and tourist spending. Nevertheless, vacancy rates
are low and this should support both markets. The prospects of rental growth in the office sector are more
positive. There are significant opportunities for new development projects, which both domestic and foreign
developers can take advantage of. More importantly, given that new constructions which are initiated now
are likely to take around two years to complete, it is unlikely that the there will be a substantial over-supply
in the near term, which bodes well for the sector.
Country Rewards
The country reward score is 89.7 out of 100, putting it first place among Asian countries. The score reflects
Hong Kong's position as a world-class financial centre with a sophisticated economic and banking
infrastructure as well as historically strong working relationships with Europe and the US. In addition to the
strength of the business environment which supports the office sector, a sophisticated consumer sector, a
growing population of affluent households with higher disposable incomes and an urbanisation rate of
100% underpins demand for retail space on the one hand and drives demand for imported goods and thus
demand for storage and warehouse space on the other. Also important is the maturity of the financial
infrastructure and availability of bank lending in Hong Kong that allows investment and development by
both domestic and overseas investors.
Risks
Industry Risks
With regards to risks, Hong Kong has an overall score of 84.6 out of 100, which places it second place after
Thailand. This is due to a high risk score at industry level (85.0) compared to other countries in the region.
The score for Hong Kong is influenced by subdued rental growth prospects in the next 12 months and static
prices at present, particularly in the retail property market, where lower spending by Chinese visitors has
had an adverse effect at the luxury end of the market. This in turn means that Hong Kong currently
underperforms compared to some of the more active markets in competing countries in the region.
Furthermore, there is little sign of growth returning to either retail or industrial real estate markets in 2016.

Country Risks
The country risk score is 83.8. It is primarily a reflection of Hong Kong's dependence on the Chinese
economy, which makes it vulnerable. Mainland China accounts for more than half of Hong Kong's exports.
Furthermore, with more than 60mn Chinese visiting Hong Kong, the retail and leisure industries are also
heavily dependent on China and are open to influences from the mainland. Tensions over the relationship
with the Chinese Communist Party in Beijing will continue to dominate on the political risk front, while
further economic integration with the mainland could be affected by policy changes such as a restriction on
tourist visitation rights.

Market Overview
BMI View: Limited availability of high quality stock remains a prominent issue within the Hong Kong
commercial real estate market. Lack of desirable space within prime business areas has seen corporates
looking to operate in sub-market districts regarding office developments, whilst retail has witnessed a
number of retailers close stores to avoid detrimental impact from a sizeable loss in Chinese tourism.
Industrial offers promise from contemporary manufacturing inauguration, and should support a dynamic
real estate sector.
The investment market in Hong Kong recorded a slow start in 2015, with transactions volumes significantly
lower than in the past two years. The decline in the level of trading has been largely due to the scarcity of
high quality assets for sale. The volume of tradable stock, particularly en-bloc assets, has fallen following
robust investment levels during 2013 and 2014. This in turn has led to institutional investors, including
REITs, to consider undertaking development. One example is LINK REIT's purchase of a commercial site
in Kowloon as part of a joint venture with Nan Fung. The site comprises 844,000sq ft of developable area
and was purchased for HKD5.59bn (HKD6,630 per sq ft).
There were nine en-bloc asset sales in the first three months of this year. The largest was the acquisition of a
commercial/residential building in Wan Chai by the Emperor Group for HKD683mn. Other en-bloc deals
have included the purchase of Centre Hollywood, Sheung Wang (32,728sq ft) for HKD550.0m and Yue
Fung Industrial Building (93,100sq ft) for HKD430.0m. We expect to see an increase in this type of asset as
new developments are delivered to the market in the next few years.
Owner-occupation has become more popular and consequently end users have accounted for a significant
proportion of the deals in 2015. The Shanghai Commercial Bank's purchase of the three floors in KCC,
Tower B, Kwai Chung, for HKD741mn is one example.
In the retail market, investor sentiment has been affected by weaker retail sales and a wane in spending from
mainland China tourists. Both prime and secondary locations are feeling the squeeze, with a combo of high
rents and lower consumer confidence is particularly affecting luxury brand establishments, with some
retailers even closing stores to remain profitable. TAG Heuer is a recent casualty with the closing of the
brands Causeway Bay store in Q3 2015, whilst leather produce distributor Coach has vacated its Central
district residency. This is a trend that many industry players are expecting to continue for the coming
months at street level. Therefore, investors are likely to remain cautious in the short term, particularly with
regard to assets that cater to the luxury end of the market, where vacancy rates are becoming higher.

Although, the dwindling appetite is not just limited to the high-end goods on street level; Wharf Holdings'
Harbour City mall saw retail sales slump 7% and their Times Square mall by 10% over H1 2015 -both
developments consisting of luxury retail units- and indicates a developing prevalent issue for landlords of
such builds, especially considering that retailers are now asking their respective landlords for rental
discounts in order to stave off a reduction in sales. In contrast, smaller shopping malls in non-tourist areas
are holding up better, and have seen rents remain fairly stable as a result of growing interest for retailers
into these establishments to reduce operating costs.
In the industrial market, turnover has been solid, but the majority of deals so far this year have comprised
smaller lot sizes. The self- storage segment has been expanding and attracting investor interest. Industrial
buildings with potential to be converted to office accommodation are expected to remain popular with
investors especially in the run up to the end of government's revitalisation programme in March 2016.
September 2015 witnessed Hong Kong announcing the 'reindustrialisation' project -with the first phase
looking to be completed by 2020- in an attempt to diversify the heavy reliance on the financial industry,
which is significantly influenced by regional economic health. This will see the government introducing
favorable operating policies for contemporary manufacturers, and offer incentives for developers to build
new 'science and technology' industrial parks. As a result, we expect to see rising interest from foreign
companies involved with modern manufacturing looking to operate in such locations.
Around 2mn sq ft of space is likely to come on the market in the office sector over the remainder of 2015
alone, through new projects that are currently under construction. This increase in the supply of new space
coming to the market should also provide investors with the much needed high quality space and inject a
higher level of investor confidence in the commercial real estate sector. Although, it is principal to consider
that this does not include builds into the highly desired CBD district, which will continue to witness
staggeringly low vacancies and rising rental rates. This can be witnessed by Sun Hung Kai, Hong Kong's
largest developer and a major landlord, who reported that their rental income from establishments within the
desired business district rose 7%, a figure buoyed by the rising demands for space in their flagship builds
such as the International Commerce Centre -a primary target for potential corporates. Demand for these
particular top quality spaces is unlikely to dip over 2016, considering there are no new developments in the
pipeline expected to reach this location within the next two years. Much of the new construction entering
the office market will be taking place in Kowloon East, which is rapidly becoming an up and coming area,
attracting occupiers that are looking for high quality accommodation at attractive rents. The new
developments will give investors the opportunity, perhaps for the first time, to acquire high quality assets in
both established and emerging office locations. Chinese city commercial banks represent a key demand
driver for space within emerging secondary markets; several mid-sized establishments operate

representative offices but are yet to acquire appropriate licensing. Additionally, it is anticipated that the
Hong Kong Monetary Authority will approve the open of new branches and see these offices -around 2,000
to 3,000sq ft typically due to initial restrictions- expand to around 30,000sq ft once full-service operations
have been approved in the city, offering opportunity for investors to capitalise on the growing trend within
smaller markets.
On the downside, real estate investment activity could be affected by two factors: firstly, rising interest
rates. Although this is likely to be marginal and gradual, nevertheless it will check any downward pressure
on property yields, reducing the potential for growth in capital values. The extent to which this is mitigated
will depend on the underlying strength of the occupier market and the degree of uplift in rental values over
the next five years. Provided new developments are phased in gradually over the medium term to avoid the
possibility of over-supply, the anticipated demand, should help to stimulate further rental growth and help
the sector to deliver a solid overall performance and to keep investors keen.
The second factor that could impact on investor interest is the currency exchange rate. This could also be a
concern to international investors, because the Hong Kong dollar is pegged to the US dollar and any
strengthening in the US dollar will be followed in Hong Kong. This would clearly make assets in Hong
Kong more expensive and could potentially deter some investors, especially as countries such as such as
Japan and South Korea will continue to compete strongly for investor capital.
We believe that the office sector is likely to remain the main focus of attention from investors in the next
few years. Central and surrounding CBD districts are likely to benefit most given the strength of the
financial sector in these areas. Decentralised offices should also see greater demand from investors as new
development takes place. Retail assets in Admiralty and Causeway Bay should remain popular, but smaller
shopping malls away from tourist spots could also become more attractive, particularly where there is
potential for value-add. Overall, a liquid and transparent investment market is likely to continue to maintain
the attraction of the Hong Kong real estate sector to international and domestic players, REITs and private
investors.

Competitive Landscape
BMI View: Hong Kong retains a sizeable proportion of international and domestic players within its
commercial real estate market. Open trade policy, investor friendly and good business transparency
represent appealing aspects for potential companies looking to establish here. Strong domestic presence is
a factor in the market, but there are foreign players who have a similar footing in areas such as Retail.
Opportunity to enter the market is focused in the mid-term amid stronger fundamental growth.
Hong Kong has an open and transparent real estate sector and as such is home to many global as well as
domestic development and investment companies, focusing both on Hong Kong and elsewhere in Asia.
Strong demand combined with rental and capital growth has historically attracted property managers to the
real estate sector in Hong Kong. A strong economy and a dynamic commercial property market are likely to
continue to encourage a greater degree of involvement in the medium term.
Interest comes from both domestic and foreign institutional players, namely pension funds and insurance
companies, who tend to be involved on all sectors of the real estate market and undertake not only
transactions, but also development independently or through joint ventures.
REITS (Real Estate Investment Trusts) are an important and active group in the commercial real estate
sector. There are currently 11 REITS listed on the Hong Kong Exchange (HKEX). These are involved
either in a specific sub-sector such as shopping centres or are engaged in all three sectors. High Net Worth
individuals form a third category of investors in the real estate sector and undertake acquisitions for private
portfolios. They are often advised by wealth managers who specifically cater for family offices and wealthy
individuals.
Property Developers
The real estate sector offers a wide variety of opportunities to development companies and the Hong Kong
market is open to developers from overseas. Below we provide a short profile of a select few:
Swire Properties: Established in Hong Kong in 1972, Swire Properties develops and manages large-scale,
mixed-use developments. It was listed on the Main Board of the Stock Exchange of Hong Kong in 2012 and
is a subsidiary of publicly listed Swire Pacific. The company has an international outlook with a portfolio of
developments in prime locations across Hong Kong, mainland China, the US and the UK. Projects include
office buildings, shopping malls, hotels and residential developments. In Hong Kong its portfolio consists of
Pacific Place, Central. This is a high quality mixed-used development comprising a luxury shopping mall,

three office towers, luxury serviced apartments and four high-end hotels. It is owned and managed by Swire
Properties. Future developments in the pipeline include: redevelopment of three existing industrial buildings
into two Grade A office towers and a new landscaped square of approximately 69,000sq ft at Taikoo Place;
a residential project at 100 Caine Road to be completed in 2016 and the residential project in n Cheung Sha,
South Lantau, which is scheduled to be completed in 2015.
Wheelock Properties: This is a wholly-owned subsidiary of Wheelock and Company Limited. Its
principal activities include the undertaking of property development, sales and marketing. In addition it also
undertakes the asset management functions of certain Wheelock and Wharf Group properties. The parent
company is a listed investment holding company headquartered in Hong Kong.
Wharf Holdings, the Group's principal investment arm, is strategically focused on property and
infrastructure in Hong Kong and China. Among the properties in its portfolio is One Bay East, which is a
twin tower Grade A office buildings ideally located in the heart of Hong Kong's CBD2. The West Tower of
the development was presold to Manulife (International) Limited at HKD4.5bn in April 2013 and the East
Tower was sold to Citi at HKD5.425bn in Jun 2014. Situated at the waterfront of Kowloon East, One Bay
East is expected to be complete by the end of 2015. Other properties include One Harbour Gate, Kowloon
and Wharf T & T Square, which is located along the waterfront in East Kowloon.
Billion Development: This is a property developer in Hong Kong that focuses on developing Grade A
office buildings. The company started out by developing office space in Lai Chi Kok during the late 1990s.
Realizing the strong demand for new workspace they purchased old industrial buildings for
redevelopment.The company has developed around 1m sq ft of office and industrial space in Lai Chi Kok.
Among existing projects are 15 Gong Yip Street, 10 Shing Yip Street, 3 Kwan Street, 56 Tsun Yip Street,
One Sheung Yuet Road, Billion II Plaza and 403 Castle Peak Road.
In recent years, greater focus has been placed on Kwun Tong and Kowloon Bay in an attempt to capture the
potential created by the new infrastructure developments in the region. By the end of this year the company
will have added another 1.2m sq ft of office space, in five Grade A office developments in Kwun Ton,
Kowloon Bay and San Po Kong, as well as 500,000sq ft of commercial and retail space. A further two
developments are scheduled for completion in 2015, in Shek Mun. These will provide up to 900,000 sq ft of
office and commercial space that are directly adjacent to the MTR station.
Sun Hung Kai Properties Limited (SHKP): Publicly listed in 1972, SHKP is now one of the largest
property companies in Hong Kong. It specialises in developing premium-quality residential projects, offices
and shopping centres. Its core business is the development of properties for sale and investment. It has

complementary operations in property-related fields including hotels, property management, construction,

insurance and mortgage services, as well as investments in telecommunications, information technology,
infrastructure and other businesses. The Group had a property portfolio of over 10mn sq ft comprising
shopping centre and retail shop as of December 31 2014. Most of the malls are in prime areas. The Group's
office portfolio contains approximately 10mn sq ft of gross floor area in Hong Kong. The properties include
International Commerce Centre in West Kowloon, International Finance Centre in Central, Central Plaza
and Sun Hung Kai Centre in Wan Chai, Millennium City in Kowloon East and Grand Century Place in
Mong Kok.
Cheung Kong (Holdings): This is active in real estate development and management. It operates in office,
retail, industrial, hotel and residential property. At the end of 2013 it managed a portfolio of some 89mn sq
ft. In addition to its Hong Kong interests, it also operates in mainland China and elsewhere, and has interests
in other industries.
Hongkong Land: Hong Kong Land describes itself as one of Asia's leading property investment,
management and development groups. It owns and manages almost 8mn sq ft of premium office and retail
space in Asia, mainly in Hong Kong and Singapore. In Hong Kong, its 4.5mn sq ft portfolio is in the
Central district. The company is listed on the London Stock Exchange, and has secondary listings in
Bermuda and Singapore.
Emperor International Holdings Limited: Real estate investment and property development is one of the
core businesses of Emperor Group and is mainly managed by Emperor International Holdings Limited.
Established in 1990, it has been constantly expanding its businesses and strengthening its property
portfolios in Hong Kong, Macau the Mainland China as well as overseas. Over the years, the Group has
been actively acquiring retail spaces in prime shopping locations especially on Russell Street, Causeway
Bay. The Group owns a wide range of office towers. These include Emperor Group Centre, which houses
the Hong Kong headquarters of the Group, Empire Land Commercial Centre,60 Gloucester Road and 75-79
Lockhart Road project. Buildings in industrial districts, such as New Media Tower in Kwun Tong, Toppy
Tower in Kwai Chung and The Ulferts Warehouse Centre in Tuen Mun, are also part of its portfolio.
REITS
There are currently 11 REITS listed on the Hong Kong Exchange. A selection of these is presented below
by way of example:
Link REIT: The Link REIT is the first real estate investment trust listed in Hong Kong. It is currently
Asia's largest REIT and one of the world's largest retail focused REITs in terms of market capitalisation.

The portfolio consists of properties with an internal floor area of approximately 11mn sq ft of retail space
and approximately 76,000 car park spaces. In 2014, The Link REIT became a constituent stock of the Hang
Seng Index. Around 60% of the properties in the Link REIT are in the New Territories, while those in
Kowloon and Hong Kong Island account for 30% and 10% respectively. Among major transactions over the
past two years are Lions Rise Mall, in East Kowloon purchased in 2014, Maritime Bay Shopping Mall in
Tseung Kwan O area, bought in 2013 and Nan Fung Plaza, Tseung Kwan O also purchased in 2013. More
recently Link REIT and Nan Fung Development have in a joint venture undertaken to develop a commercial
site in Kowloon East for a Grade A office development, which is expected to be completed in June 2020.
Sunlight REIT: Sunlight REIT offers investors the opportunity to invest in a diversified portfolio of twelve
office and seven retail properties in Hong Kong with an aggregate gross area of approximately 1.3mn sq ft.
The office properties are primarily located in core business areas, including Central, Wan Chai, Sheung
Wan as well as Tsim Sha Tsui. They also have properties in n decentralised business areas such as North
Point, Mong Kok/Yau Ma Tei and Aberdeen. The retail properties are primarily situated at regional
transportation hubs and New Towns including Sheung Shui, Tseung Kwan O and Yuen Long, as well as in
urban areas with high population density.
Hui Xian REIT: This is the first RMB-denominated REIT listed in Hong Kong. Its portfolio spans across
retail, office and serviced apartment and hotel businesses.
Fortune REIT: Listed on August 12 2003 on the Singapore Exchange with a dual primary listing on The
Stock Exchange of Hong Kong on April 20 2010, Fortune REIT was Asia's first cross-border REIT and also
the first REIT to hold assets in Hong Kong. It currently holds a portfolio of 17 private housing estate retail
properties in Hong Kong comprising of 3.18mn sq ft of retail space and 2,713 car parking spaces.
Champion REIT: Champion REIT is a real estate investment trust formed to own and invest in an income-
producing portfolio of commercial properties primarily in Asia. Currently, Champion REIT owns
approximately 2.2mn sq ft of Grade A office space and 650,000sq ft of prime retail space in Hong Kong.
The trust's assets include Citibank Plaza, Central and Langham Place and an integrated project in the
commercial district of Mongkok, in the Kowloon.
Property Managers
Hong Kong is widely recognised as the leading fund management centre in Asia with a large concentration
of international fund managers active in the real estate sector. The diversity of the fund management sector
means that all global investment managers are represented including companies such as Standard Life,

ManuLife, TIAA Henderson, Invesco, UBS and many others. Away from these we have chosen to provide a
profile of some of the other asset managers below:
Soundwill Holdings Limited: The company has been engaged in the real estate business for three decades
and is listed on the Stock Exchange of Hong Kong since 1997. Today, total assets amount to over
HKD20bn. Rooted in Hong Kong, its business coverage has been rapidly expanding in mainland China.
Their aim is to strengthen their operations in Hong Kong and expand their long-term business interests in
mainland China. The investment properties held by the Group include commercial, office and residential
buildings. Most of these are located in prime commercial spots, such as Causeway Bay and Wan Chai.
HuaAn Fund Management Company: Since its inception in 1998, HuaAn Fund Management has grown
to become one of the largest fund management firms in mainland China. The company manages over
USD13bn (September 30 2011) and provides a full range of investment products and advisory services for
domestic and international clients. Its client base includes leading global institutional investors including
pension funds and endowments firms. HuaAn Asset Management (Hong Kong) Ltd. was established in
Hong Kong in 2010 as a wholly owned subsidiary of HuaAn Fund Management Company Ltd.
Harvest Global Investments Limited: HGI was established in Hong Kong as a wholly owned subsidiary
of Harvest Fund Management (HFM) in 2008 with the aim of being an internationally recognised leading
Asian specialist asset manager. Harvest Fund Management is a privately owned investment manager. The
firm provides asset management and retirement management services for pensions to insurance companies..
Palmer Capital: In January 2012, Palmer Capital bought a 50% stake in Emboss Capital, a boutique asset
management platform founded in Hong Kong in 2009, and renamed it Palmer Capital Asia (PCA). This
platform provides key support and management for investors in and out of the Asian region. PCA
specialises in alternative investment strategies designed to take advantage of local market demographics.
Over the past few years, the company has transacted and managed over USD2.0bn of direct real estate
across Australia, Singapore, Malaysia, Hong Kong, Macau and Japan. PCA has also implemented and
supervised asset origination, underwriting, due-diligence and tax structuring in New Zealand, Thailand,
Korea and Taiwan. Headquarters in Hong Kong, with a presence in Singapore, PCA provides clients with a
foothold in the Asian markets.
Pamfleet Group: Pamfleet Group is an experienced real estate investment advisor, with offices in
Hong Kong and Singapore. Since the group was established in 2000, it has originated and asset
managed 3.8 m sq ft of properties worth over USD1.0bn worth of assets in Asia. Its activity has

centred on office, retail and residential sectors. The focus has been on value-add investment opportunities,
where properties can be repositioned through physical improvements, aggressive leasing programmes, and
improved asset and building management, including re-branding. Among properties that are currently
being managed by Pamfleet Group is 75 Hung To Road in Kwun Tong, KOHO, which is one of the
largest Grade A office revitalization projects in Kowloon East. Formerly known as Kian Dai Industrial
Building, this factory built in the 1980s has been transformed into over 200,000sq ft of high office space in
2014 targeting large occupiers.
Phoenix Property Investors: This is an independent private equity real estate firm that focuses on
fundamental value-oriented opportunities in first-tier Pan-Asian markets. From luxury apartments to
commercial, retail and office spaces, the company invests in diverse real estate portfolio in various markets
across Asia. Since 2002, Phoenix has raised approximately USD2.0bn of equity for real estate investment
and development opportunities in the residential, retail, office and commercial sectors throughout Asia,
through a network of local and affiliated offices in Hong Kong, Taipei, Tokyo, Singapore and Shanghai.
The total real estate assets under management is in excess of USD4.9bn. The real estate portfolio is 49% in
Hong Kong, 35% in Taiwan and 13% in China. By asset type, just under 50% of the portfolio is residential,
with retail accounting for18%, mixed use for 15% and offices for 7.0%.
Mapletree: Mapletree is a leading real estate investment and capital management company headquartered
in Singapore. As at March 31 2015, Mapletree had assets under management of USD28.4bn spanning retail,
office, logistics, industrial, residential, corporate housing/serviced apartments, and mixed-use properties.
Presently, Mapletree manages four Singapore-listed real estate investment trusts (REITs) as well as six
private real estate funds comprising a diverse portfolio of assets.
ARA Asset Management Limited (ARA): The company has been a real estate fund manager in Asia, since
2002. ARA has built a diverse suite of real estate investment trusts (REITs) and private real estate funds that
are invested in the office, retail, logistics/industrial, hospitality and residential sectors in the Asia Pacific
region.ARA is listed on the Singapore Exchange Securities Trading Limited (SGX-ST) since November
2007. As of June 2015, it is managing total assets in excess of USD27bn.
Overall, the development, acquisition and management of commercial real estate portfolios in Hong Kong
is becoming an increasingly attractive proposition for both developers and investors, owing to rising rental
rates and good prospects for capital growth. And we are likely to see greater involvement in the market by
international as well as domestic investment managers and property development companies.

Demographic Forecast
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only
is the total population of a country or territory a key variable in consumer demand, but an understanding of
the demographic profile is essential to understanding issues ranging from future population trends to
productivity growth and government spending requirements.
The accompanying charts detail the population pyramid for 2015, the change in the structure of
the population between 2015 and 2050 and the total population between 1990 and 2050. The tables show
indicators from all of these charts, in addition to key metrics such as population ratios, the urban/rural split
and life expectancy.
Population
1990-2050 (1990-2050)
10
7.5
2.5
0
1990
2000
2005
2010
2015f
2020f
2025f
2030f
2035f
2040f
2045f
2050f
Hong Kong - Population, mn
f = BMI forecast. Source: World Bank, UN, BMI

Hong Kong Population Pyramid

2015 (LHS) And 2015 Versus 2050 (RHS)
Source: World Bank, UN, BMI
Table: Population Headline Indicators (Hong Kong 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Population, total, '000 5,794 6,783 6,842 6,993 7,287 7,557 7,781
Population, % y-o-y na 1.4 0.0 0.6 0.8 0.7 0.5
Population, total, male, '000 2,962 3,304 3,270 3,280 3,421 3,548 3,651
Population, total, female, '000 2,831 3,479 3,572 3,712 3,866 4,008 4,129
Population ratio, male/female 1.05 0.95 0.92 0.88 0.89 0.89 0.88
na = not available; f = BMI forecast. Source: World Bank, UN, BMI
Table: Key Population Ratios (Hong Kong 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Active population, total, '000 4,045 4,869 5,041 5,247 5,318 5,190 4,941
Active population, % of total population 69.8 71.8 73.7 75.0 73.0 68.7 63.5
Dependent population, total, '000 1,748 1,913 1,800 1,746 1,969 2,366 2,839
Dependent ratio, % of total working age 43.2 39.3 35.7 33.3 37.0 45.6 57.5

Key Population Ratios (Hong Kong 1990-2025) - Continued
1990 2000 2005 2010 2015f 2020f 2025f
Youth population, total, '000 1,245 1,166 968 843 871 991 1,107
Youth population, % of total working age 30.8 24.0 19.2 16.1 16.4 19.1 22.4
Pensionable population, '000 503 746 832 903 1,097 1,374 1,732
Pensionable population, % of total working age 12.5 15.3 16.5 17.2 20.6 26.5 35.1
Table: Urban/Rural Population & Life Expectancy (Hong Kong 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Urban population, '000 5,766.0 6,783.5 6,842.5 6,993.6 7,288.0 7,557.2 7,781.1
Urban population, % of total 99.5 100.0 100.0 100.0 100.0 100.0 100.0
Rural population, '000 28.0 0.0 0.0 0.0 0.0 0.0 0.0
Rural population, % of total 0.5 0.0 0.0 0.0 0.0 0.0 0.0
Life expectancy at birth, male, years 74.6 77.6 78.9 80.1 81.4 82.1 82.8
Life expectancy at birth, female, years 80.7 83.3 84.9 86.0 87.0 87.7 88.5
Life expectancy at birth, average, years 77.5 80.4 81.9 83.1 84.2 84.9 85.7
Table: Population By Age Group (Hong Kong 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Population, 0-4 yrs, total, '000 381 315 205 241 367 372 356

Population By Age Group (Hong Kong 1990-2025) - Continued
1990 2000 2005 2010 2015f 2020f 2025f
Population, 100+ yrs, total, '000 0 0 0 1 2 4 5
Table: Population By Age Group % (Hong Kong 1990-2025)
1990 2000 2005 2010 2015f 2020f 2025f
Population, 0-4 yrs, % total 6.58 4.66 3.01 3.45 5.04 4.92 4.59

Population By Age Group % (Hong Kong 1990-2025) - Continued
1990 2000 2005 2010 2015f 2020f 2025f
Population, 100+ yrs, % total 0.00 0.00 0.01 0.02 0.03 0.05 0.07

Methodology
Industry Forecast Methodology
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric modelling. The precise form of model we use varies from industry to industry, in each
case being determined, as per standard practice, by the prevailing features of the industry data being
examined.
Common to our analysis of every industry is the use of vector autoregressions. These allow us to forecast a
variable using more than the variable's own history as explanatory information. For example, when
forecasting oil prices, we can include information about oil consumption, supply and capacity.
When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality
is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for
analysis and forecasting.
BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use
of objective views, we use a 'general-to-specific' method. BMI mainly uses a linear model, but simple non-
linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for
example poor weather conditions that affect agricultural output, dummy variables are used to determine the
level of impact.
Effective forecasting depends on appropriately selected regression models. We select the best model
according to various different criteria and tests, including but not exclusive to:
R2 tests explanatory power; adjusted R2 takes degree of freedom into account;
Testing the directional movement and magnitude of coefficients;
Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value);
All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.

BMI uses the selected best model to perform forecasting.
Human intervention plays a necessary and desirable role in all of our industry forecasting. Experience,
expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous
data, turning points and seasonal features where a purely mechanical forecasting process would not.
Sector-Specific Methodology
In each of the countries surveyed, we make contact with local sources (typically major commercial real
estate agents) and ask them 10 questions in relation to three commercial real estate sub-sectors:
Office
Retail
Industrial
We have combined the answers into the data tables and text that form part of the market overviews and
industry forecast scenario. In taking this grass-roots approach, we believe we ensure that we identify, in a
timely fashion, key issues that will likely drive rents and yields over the short, medium and long term. We
have developed a framework that facilitates comparisons between cities and sub-sectors in different
countries.
In developing our long-term forecasts, we have focused on net yields. Our view is that as yields are driven
by both rentals and capital values, the movements in yields provide a convenient short-hand for what is and
is not expected to be happening in markets.
Sources
Sources used in real estate reports include UN statistics, national accounts, housing and economy ministries,
officially released company results and figures, trade bodies and associations and international and national
news agencies.

Risk/Reward Index Methodology
BMI's Risk/Reward Index provides a comparative regional ranking system evaluating the ease of doing
business and the industry-specific opportunities and limitations for potential investors in a given
market. The system divides into two distinct areas:
Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state
characteristics that may inhibit its development. This is further broken down into two sub categories:
Industry Rewards. This is an industry-specific category taking into account current industry size and
growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall
score for potential returns for investors.
Country Rewards. This is a country-specific category, and factors in favourable political and economic
conditions for the industry.
Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic
profile that call into question the likelihood of anticipated returns being realised over the assessed time
period. This is further broken down into two sub categories:
Industry Risks. This is an industry-specific category whose score covers potential operational risks to
investors, regulatory issues inhibiting the industry, and the relative maturity of a market.
Country Risks. This is a country-specific category in which political and economic instability,
unfavourable legislation and a poor overall business environment are evaluated to provide an overall
score.
We take a weighted average, combining industry and country risks, or country and industry rewards. These
two results in turn provide an overall Risk/Reward Index score, which is used to create our regional ranking
system for the risks and rewards of involvement in a specific industry in a particular country.
For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall
Risk/Reward Index score being a weighted average of the total score. As most of the countries and
territories evaluated are considered by BMI to be 'emerging markets', our indices are revised on a quarterly
basis. This ensures that we draw on the latest information and data across our broad range of sources, and
the expertise of our analysts.

Indicators
The following indicators have been used. Overall, the Risk/Reward Index uses four subjectively measured
indicators, and over 20 separate indicators/datasets.
Table: Real Estate Risk/Reward Index Indicators
Rationale
Rewards
Industry Rewards
Construction output, USDbn (previous Absolute size of construction sector used as proxy for size of real estate
year) sector.
Construction sector real growth, Indicates prospects for, and confidence in, the construction sector, and
compound annual growth rate (CAGR) hence a proxy for prospects/confidence for real estate sector.
(previous year to three years hence)
Total commercial bank lending, USDbn Real estate projects are long term and capital intensive, with most finance
(end previous year) obtained from commercial banks. Indicates funding availability.
Commercial bank lending, CAGR (previous This indicates prospects for the stability of finance and, implicitly, its cost. In
year to three years hence) times of crisis, this is likely to be the most volatile indicator.
Country Rewards
This captures the efficiency of the commercial banking sector and other
BMI's business environment index score elements of the financial services industry in making funding available to the
for financial infrastructure real estate sector.
Higher per capita GDP correlates with the expansion of the middle classes,
Per capita GDP, USD which are the key market for residential real estate, and the users of
commercial and retail real estate.
Urbanised states tend to be more conducive markets for real estate
development, as they have deeper, more mature markets. That said, our
Urbanisation, % of total population living in scoring methodology views favourably less urban, or even predominantly
urban areas rural, states that are characterised by persistently strong construction sector
growth.
Risks
Industry Risks
It is assumed that lending volumes and nominal GDP should, generally,
Lending risks, ratio of the growth in grow at the same rate. If lending growth substantially exceeds nominal GDP
nominal lending (ie, by commercial banks expansion, this would suggest deterioration in risk standards by lending
to non-bank customers) to the nominal institutions. Conversely, if nominal GDP rises substantially faster than bank
growth in GDP over a five-year period (last lending, the cost of finance for real estate ventures is likely to rise, affecting
year to current year plus three) profitability.
This is used as a proxy for the stability of finance. Thus, a rapid decline in
the ratio (ie a lending squeeze) is penalised. Conversely, we are more
Financial institution confidence, change in tolerant of a rise in lending, as in itself, this may be positive for the industry.
the loan to deposit ratio over a five-year High rates of lending growth are penalised as they could indicate an
period (last year to current year plus three) investment bubble unless BMI's short-term economic score for the state, a
proxy for vulnerability to an economic shock, is very high.
Where possible, we have identified a national index (usually for house
Real estate prices, % change y-o-y prices) and assess annual growth. The indicator is symmetrical, in that high
growth (which indicates a bubble) is penalised, as is sharp price falls (which

Real Estate Risk/Reward Index Indicators - Continued
Rationale
indicates that bubbles have been burst). Where no real estate price index is
available, this indicator does not affect the overall score for this section.
Country Risks
BMI's long-term economic index score A measure of long-term economic stability.
BMI's business environment legal Denotes the strength of legal institutions in each state. Security of
framework index score investment can be a key risk in some emerging markets.
Source: BMI
Weighting
Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal
weight. Consequently, the following weight has been adopted.
Table: Weighting Of Indicators
Component Weighting (%)

Rewards 50, of which
Industry Rewards 65
Country Rewards 35
Risks 50, of which
Industry Risks 65
Country Risks 35
Source: BMI

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Published by:BMI Research

Part of BMIs Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: October 2015

BMI Research 2015 Business Monitor International Ltd

Part of BMIs Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: October 2015

BMI Research 2015 Business Monitor International Ltd

BMI Industry View ............................................................................................................... 7

Industry Forecast .............................................................................................................. 15

Macroeconomic Forecasts ............................................................................................... 42

Industry Risk Reward Index ............................................................................................. 47

Market Overview ............................................................................................................... 50

Competitive Landscape .................................................................................................... 53

Demographic Forecast ..................................................................................................... 59

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Table: Key Population Ratios (Hong Kong 1990-2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

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BMI Industry View

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SWOT Analysis - Continued

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SWOT Analysis - Continued

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Economic Growth Set To Accelerate

BMI/Census and Statistics Department

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Growth in Tertiary Services To Drive Demand for Office Space

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Table: Office Rental Rates

2010 2011 2012 2013 2014 2015

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Table: Office Yields 2010-2019

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Spending Levels To Drive Demand For Retail Space

BMI/Hong Kong Census and Statistics Department

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Affluence And Higher Purchasing Power Will Benefit Retailers

BMI/Hong Kong Census and Statistics Department

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Table: Retail Rental Rates 2010-2015

2010 2011 2012 2013 2014 2015

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Table: Retail Yields 2010-2019

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Trade Flows Drive Demand For Warehouse Space

BMI/Census and Statistics Department

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Growth In Manufacturing Production Will Increase Demand For Distribution

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Table: Industrial Rental Rates 2010-2015

2010 2011 2012 2013 2014 2015