Recent policy changes to the QDII scheme allowing qualified domestic institutional investors in the mainland to invest in overseas investment exchanges are likely to have a positive impact on Hong Kong's property market, an analyst says.
The China Banking Regulatory Commission earlier this month unveiled its long- awaited plan to widen the investment scope of the QDII scheme to also cover equities and structured products.

The move will allow commercial banks and funds to buy overseas stocks in an effort to encourage more fund outflows and ease the excess liquidity which has sent the domestic stock market to new highs.

Eric Wong, co-head of Asia real estate research at UBS, said in addition to increasing "depth and breadth" of demand for Hong Kong stocks and other investment products, the move will also increase demand for office space as QDII managers will have to shift to Hong Kong to oversee the market.

He said the move has opened the door for China to further expand the quota, but it is hard to say whether Beijing will do that now as it depends on how successful the new QDII rules are in attracting investment.

"Strong fundamentals such as low mortgage rates, low land supply and real interest rates turning negative in Hong Kong will prompt an increase in value of both Hong Kong property and property stocks," said Wong, who maintains his forecast that housing prices in the SAR will rise by 30 percent this year.

Analysts said expected housing demand from QDII managers is also likely to help boost the luxury residential market.

Real estate consultancy firm Knight Frank has revised the rental growth forecasts for luxury apartments this year from 5-8 percent to 12-15 percent.

Vacancy rates of many residential blocks in traditional luxury residential districts such as The Peak, Island South and Mid-Levels have dropped to below 4 percent.

This has led to a greater-than-expected rental increase of 4 percent in the first four months of this year against the end of last year, Knight Frank said.

Rental growth of luxury residential properties is set to accelerate when the peak season for new expatriate arrivals begins in the summer.

Knight Frank has also upwardly revised its rental growth forecasts for Grade A offices for 2007, due to a faster-than-expected influx of Chinese and multinational corporations as well as a robust domestic economy.

Demand for prestigious office space in Central continues to be strong, with limited stock available in the premium Grade A buildings such as IFC, Cheung Kong Center, Chater House and AIG Tower, said Andrew Ness, executive director of CBRE Research, Asia.

As a result of the persistent demand, especially from banking and hedge fund tenants, Central has witnessed rapid rental growth. A prime example is the 5,000-square-foot new letting on level 67 of Two IFC to a hedge fund at a net effective rent of HK$170 per square foot, a record high for the Hong Kong market.

Belgian bank Fortis is committed to leasing three floors totaling 30,000 sqft in Three Exchange Square as part of its expansion strategy.

Meanwhile, Lehman Brothers has secured expansion space of 23,000 sqft and 10,000 sqft in Two IFC and Man Yee Building respectively.

Other new lettings include US legal firms Fried Frank - 18,500 sqft in Gloucester Tower - and White & Case, who have leased three entire floors totaling 22,500 sqft in Central Tower.

In other Hong Kong Island office submarkets, leasing activity is comparatively quiet, Ness said.

Competition among Causeway Bay landlords heightened as vacancies rose in some buildings. Some tenants are making tentative plans to move to new buildings soon be launched in the market, such as International Commerce Centre at Kowloon Station and One Island East in Quarry Bay.

Sources said Credit Suisse and Morgan Stanley are in discussions to lease ICC.

The leasing negotiations for the first phase of ICC, with an expected occupation permit date in December 2007, have reached the advanced stage, predominantly with Hong Kong Island occupiers, Ness said.

While ICC is expected to alleviate the current shortage of CBD office space, it has yet to produce adverse pressure on rentals in Central that have shown no signs of declining, he added.

He said the imminent supply of several quality buildings in East Kowloon, particularly in Kwun Tong and Kowloon Bay, is providing viable cost effective opportunities to tenants on Hong Kong Island, which will place downward pressure on rents in decentralized districts as 2007 progresses.

In Tsim Sha Tsui, vacancies of Miramar Tower dropped significantly in the first quarter after the landlords, Miramar Group and Henderson Land Development (0012), took up about 50,000 sqft.

However, vacancies at The Gateway in the district will increase after the relocation of Sears Holdings Global Sourcing.

With an eye to rental savings and the need for consolidation after merger and acquisition activity, Sears has decided to relocate its operations from Admiralty and Tsim Sha Tsui to Langham Place in Mong Kok, occupying more than 120,000 sqft on seven floors.

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