Hong Kong Business (August - September 2019)

Display to 31 September 2019 HK$40

Issue No.55

THE

HOT NEW COMMUNITY MALLS PROPERTY DEALS DEFY PE DECLINE THE PULSE ON HOME PRICES CHECK OUT TNG’S SLEEK NEW OFFICE

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FROM THE EDITOR

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In this issue, we take a look at neighbourhood malls and flex spaces: two resilient asset classes that are defying the downturn hitting the property markets.

With yields above traditional property classes, malls located near residential neighbourhoods are holding their own even as prime street shops lose their luster.

Co-working is also seeing unprecedented growth in the city starved for space.

Over to private equity, investors are still eager to bankroll real estate and venture capital deals despite growing fears of a possible asset bubble, with 2019 seeing hundreds of millions in funding for local startups, such as logistics company Lalamove’s US$300m in February and travel booking app Klook’s US$200m in April, both in series D rounds.

Moreover, we reached out to prominent legal players for their take on the landmark ruling under Hong Kong’s competition law. Turn to page 40 to learn the implications and which industries are expected to benefit from the new policy.

On the lighter side of things, this issue takes a closer look at how HR departments are repackaging employee compensation with non-monetary bonuses to recruit and retain skilled employees.

EDITORIAL editorial@hongkongbusiness.hk

This issue will also share insights on how Instagram is changing the retail marketing scene and how shopping malls and even property developers are leveraging on social media to drive their campaigns much like well-known fashion brands.

Enjoy the read!

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CONTENTS

24

COVER STORY NEIGHBOURHOOD MALLS AND FLEX SPACES PROP UP WEAKENING PROPERTY MARKET

FIRST 06 Virtual banks threaten small firms 07 Hong Kong gears for next-gen 5G

30 Accounting firms brace for IPO boom by hiking wages

42

MARKETING BRIEFING HOW SHOULD INSTAGRAM BUDGETS BE SPENT?

LEGAL BRIEFING

12 Tech, real estate deals buck

40 It’s not fun to dummy-bid the

YWCA

rollout by 2020

RANKING

FINANCIAL INSIGHT

38

HR BRIEFING HOW BOSSES ARE RETHINKING WORKER WELLNESS

decline as Chinese appetite falls

ANALYSIS 18 Co-living takes off in costly Hong Kong amidst robust millennial take-up

28 Keep an eye out for these

indicators to know the pulse on Hong Kong’s home prices

OPINION 44 Why advanced technologies are the Holy Grail for Hong Kong employers

46 What happened to New Look Lam? 48 It’s not dysfunctional but deliberate

34 Retailers up their digital game as

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rents rise and sales fall

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ECONOMY

Hong Kong grapples with rising risk of recession: Finance Chief Chan Hong Kong will technically fall into recession should Q3 GDP post negative growth, according to finance secretary Paul Chan. The economy grew by 0.6% in Q2 due to weak performance in investment expenditure and external demand.

COMMERCIAL PROPERTY

Kai Tak site sold for $12.74b in cheapest land sale in three years A JV between Wheelock Properties, K Wah International Holdings and China Overseas Land and Investment has won the tender for a 176,366-sqft residential site in Kai Tak development area for $12.74b (US$1.63b). Kai Tak Area 4A Site 1 was sold for $11,841.70 psf, in one of the cheapest transactions in the area in the last three years.

4

HONG KONG BUSINESS | SEPTEMBER 2019

MANUFACTURING

PMI sinks to decade-low in July Hong Kong faced the steepest detorioration in private sector health since the global financial crisis as the Purchasing Managers Index (PMI) sank to 43.8 in July from 47.9 in June, according to IHS Markit.

Business confidence fell to its lowest point since January 2016

FINANCIAL SERVICES

Hang Seng Bank adds forex functionality to chatbot Hang Seng Bank has enhanced the capabilities of its AI chatbot, HARO, to address foreign exchange inquiries and concerns. Customers will be able to ask HARO via the website and app for information on current foreign exchange rates and obtain historical price charts. When customers seek to withdraw cash, HARO can provide the locations of nearby FX ATMs.

COMMERCIAL PROPERTY

Central still the world’s most expensive office market Occupancy costs in Central which include rent, taxes and service run at $2,665.8 per sqft (psf) per annum which ranks the CBD as the costliest office market for the fifth year in a row. New York City’s Midtown came second at $1,662 psf per annum.

HR & EDUCATION

A fifth of old residents still have parttime jobs: survey Three years after the government announced its plans to develop Kowloon East into a second Central Business District (CBD), Hong Kong’s first smart city is finally taking shape to help position the city as a techpowered business hub. The CBD has hi-tech features like multi-purpose lampposts that analyse air quality and even charge electric vehicles.

FIRST Authority include Livi VB Limited and SC Digital Solutions Limited which count incumbent lenders BOC Hong Kong and Standard Chartered amongst its backers.

Ant SME Services (Hong Kong) Limited, Infinium Limited and Insight Fintech HK Limited enjoy the backing of Chinese tech titans Ant Financial, Tencent and Xiaomi respectively. Online insurance giants back ZhongAn Virtual Finance Limited and Ping An OneConnect Company Limited.

Fintech unicorn WeLab rounds out the formidable eight.

Standard Chartered is one of the firms that received a virtual bank licence.

Virtual banks threaten small players

T

he arrival of virtual banks is credit negative to most incumbent Hong Kong banks because it will bring new and significant competition to several key banking areas, according to Moody’s.

Small and mid-sized sized banks that focus on serving small businesses and individual retail customers are amongst the most vulnerable from the entry of the tech upstarts that enjoy the support of their formidable parent companies as well

as the cost advantage of going branchless.

“We expect the entrance of new virtual banks, with their strong data analytical capabilities, to challenge the incumbent banks’ approach to technology adoption and usage. Incumbent banks will also be under pressure to improve their branch and staff operating efficiency,” the credit rating agency said in a report.

The eight firms that received license to operate virtual banks from the Monetary

Where it hurts The virtual newcomers will hurt small and mid-sized incumbents on three fronts. First, competition for customer deposits will become fiercer, dealing a heavier blow to smaller players given their heavy reliance on interest rate-sensitive time deposits for funding compared to large banks. Time deposits typically account for around 70% of the small and mid-sized banks’ overall deposits, data from Moody’s show.

Unlike a number of small and midsized banks that rely on occasional deposit campaigns with promotional deposit rates to attract retail deposits, virtual banks can offer attractive deposit rates to gain market share since they do not have expensive retail networks to maintain and could communicate their deposit pricing details transparently on their online and mobile platforms. “This will lower the information costs for depositors who seek out the best pricing and add to the incumbent banks’ burden to defend their market share,” Moody’s said.

CHARTIST: MUTED LOAN GROWTH WEIGHS ON BANK EARNINGS AS MORTGAGES TAKE HIT Bank loans are expected to grow at a subdued pace, following flattish or mild expansion in the past months. In May, bank loans grew 3% due to resilient mortgage demand even as foreign currency loans shrank. “We expect mid-single digit loan growth this year owing to a combination of volatilities in USD-CNY movement, uncertainties in business sentiment and liquidity tightness,” OCBC Investment Research said in a note. Banks will have to make do with dismal lending growth as their main earnings driver as borrowing from both the corporate and consumer fronts weaken, Fitch Ratings said in a report.“Rising interest rates and uncertainty around corporate investment and trade activity could tip a shift in domestic sentiment, leading to softer property markets and slower cross-border loan demand,” it said.

6

HONG KONG BUSINESS | SEPTEMBER 2019

Subdued expansion of loan books

Source: OCBC Investment Research

Margins will also remain tepid

Source: OCBC Investment Research

FIRST Analysts also expect virtual banks to focus on lending to retail customers, including individuals and small businesses, rather than large corporates given their limited balance sheet capabilities and resources to build up treasury or cash management functions. The corporate lending market also comes with relatively low yield, making it unappealing to newcomers. However, this will come at the expense of conventional banks that used to provide the credit line.

“As borrowers across the credit spectrum are already served by incumbent banks and finance companies, growth in virtual banks’ lending business will come at the expense of incumbent banks’ and finance companies’ market share,” Moody’s said.

Payment powerhouses It will not be smooth sailing on all fronts, however. Virtual banks are expected to face entrenched competition from existing payment networks in Hong Kong like Octopus, which is the dominant local electronic stored value card. According to the HKMA, there are 17.6 million credit cards issued in a population of 7.2 million.

Bank of China (Hong Kong) partnered with JD Digits and Jardines to join the virtual banking race.

Moreover, incumbent banks are tipped to defend their card business vigorously, as credit card fee income accounted for around 3% of banks’ total revenue in 2018.

“Nevertheless, the entrance of the new virtual banks, in particular Ant SME Services (HK) and Infinium (backed by

Tencent), adds to the risk of disruption from new and alternative payment methods,” Moody’s said, which will increase competition for the incumbent banks, forcing them to incur higher expenses to retain consumers through merchant tie-ins and card rewards.

Hong Kong gears for next-gen 5G rollout by 2020

According to Vincent House, communications technologies senior manager at the institute, The Office of Communications Authority (OFCA) networks, we expect to have 5G services rolled ASTRI has designed multiple testing scenarios will begin auctions for spectrums in the 3.3GHz, out and fully launched in Hong Kong in 2020,” and will submit the results to the Transport 3.5GHz, and 4.9GHz bands to prepare for the she said. The government alreadyassigned Department. commercial launch of 5G services in 2020, spectrums in the 26GHz and 28GHz bands to “The first scenario is without pedestrians according to a government announcement.

5G rollout in March. to see whether the autonomous vehicle will Office of the Communications Authority be able to recognise the pedestrian line,” said Assistant Director Sandra Cheuk said that 1,000 Autonomous cars Vincent Hou, communications technologies government premises will be opened up for The Hong Kong Applied Science and Technology senior manager of the institute. “The vehicle is applications by mobile networks. “This year, Research Institute (ASTRI) recently received the supposed to slow down and stop in front of the the government will make available a total of green light from the Transport Department to pedestrian road. Another scenario assumes there 4,500 MHz spectrum for 5G services. Taking conduct autonomous or self-driving vehicle trials is a pedestrian that jump out on to the road or into account the time needed to implement 5G for 5G research purposes. walks along the road and how the autonomous vehicle is going to react to the scenario.”

5G networks surpass 4G networks in terms of download and loading speed. Downloading a two-hour HD video, for example, will theoretically only take 10 seconds in 5G compared to the current 3 minutes in 4G. It also has minimum latency requirement, only taking four milliseconds to one millisecond to send and receive data from the cell tower.

It will also enable massive machine type communications, where more devices to connect to the network within a small area. OFCA noted that as many as one million devices per square kilometre can be connected to 5G. In April, South Korea became the first country to launch the 5G network through SK Telecom. It beat out the US by a few hours Other countries that have launched the network include the US, UK, and Australia. Singapore is ASTRI received the go-signal to conduct trials for self-driving cars. also preparing to roll out 5G by 2020.

HONG KONG BUSINESS | SEPTEMBER 2019

7

EXCLUSIVE: SPACE WATCH

Reception

Sandbox

Dedicated Office

Time Out cafe

TNG opens hub to nurture fintech talent Located at the heart of Hong Kong Island, the 25,800 sqft space aims to serve the thriving fintech community.

F

nancial services provider TNG Fintech Group has opened an expansive space at North Point designed to support fintech businesses seeking the necessary assistance to unlock their next stage of growth.

Spanning over 25,800 sqft, Wall Street Factory aims to serve as an interactive platform for entrepreneurs, startups and institutions disrupting the billion-dollar financial services industry.

With twelve signature conference rooms and three main event spaces named Arena, Wall Street Corner and Sandbox that can accommodate up to 300 individuals each, Wall Street Factory offers one-stop solutions to companies from business incorporation, office space, bank account opening, working visa application, operation support, business referral, fundraising to capital market advisory in addition to networking, innovation and resource sharing solutions.

Upon entry into the space, visitors are ushered into a reception area featuring the iconic Wall Street bull with real-time stock updates blaring through the television sets. Corridors are designed in minimalist tones designed to extract the highest productivity and employee engagement. Beyond necessary work conventions, the Wall Street Factory also comes with a gym, game corner and a time-out cafe designed to provide employees a reprieve from their work.

Since its opening on 15 July, Wall Street Factory has forged collaborations with blockchain, AI, big data and proptech companies. The space also aims to serve as 8

HONG KONG BUSINESS | SEPTEMBER 2019

Alex Kong

a central connector to investors, regulators, financial institutions, business partners, potential customers and media resources.

“This year, with the combination of Wall Street Factory, TNG is hoping to develop Hong Kong’s FinTech Community into a regional financial powerhouse, help startups grow to rising-stars to unicorns, and then to public listings in major stock exchange,” Alex Kong, founder and chairman of TNG Fintech Group told Hong Kong Business.

Giving back As one of Asia’s largest fintech groups, TNG offers a wide array of services including e-payments, remittance, global cash withdrawal and settlement and wealth management. Its e-wallet offering has accumulated over 650,000 users since its launch four years ago, according to Kong. In 2016, the company formed a Global E-Wallet Alliance (GEA) in Hong Kong and 12 other countries including China, Philippines, Indonesia, Singapore, Malaysia, Thailand, Vietnam, India and Sri Lanka.

“We believe the milestones achieved will facilitate TNG’s further steps to provide financial inclusion to the unbanked populations around the world,” said Kong.

“We believe everyone in the world deserves a better life including the ability to access basic financial services,” said Kong. “The launch of Wall Street Factory perfectly matches TNG’s commitment to elevating lives of billions with financial empowerment and financial services.”

STARTUPS

Revsmart makes driving safer

S

mart wearables startup Revsmart is giving motorcycle riders a safer and more efficient navigating solution as it offers piezo conduction technology, which is said to be the world’s lightest and thinnest audio wearable tech.

Its product, dubbed as Headsup, can fit on any helmet. It can be connected to a smartphone via bluetooth to provide access to communication, navigation and music whilst allowing the driver to become aware of his surroundings. Apart from motorcycle helmets, they have made their product available for bicycle helmets, construction helmets and skiing

helmets. His firm currently sells its products to riders, food delivery operators and two-wheeler original equipment manufacturers globally.

“Most two wheeler riders do not have a safe way to use communication, navigation or music whilst riding, so they use headphones, or put their smartphones inside the helmet, which is extremely dangerous,” Revsmart CEO Sunder Jagannathan said.

Last May, they secured $1.56m (US$200,000) in a seed funding, where the proceeds will be used to scale up its offerings across B2B markets as well as to broaden its dealer network. A part of the funds will also be used in creating a second version of Headsup. They are also working on a new cooling tech that reduces the temperature inside helmets by 10 to 15 °C. “We have been very specific in terms of our user segment and their needs,” Jagannathan added. “We have always kept our technology as well as product features 10 times better than our competition. Currently, there are very few companies working on the two-wheeler technology space, and we are trying to capture that majority in this sector.”

Vfluencer rides on the micro-influencer trend for fraud detection to make sure their followers and engagements are genuine,” Marco Siu, founder and CEO of Vfluencer, said.

Siu stated that he is seeing the rise of micro-influencer marketing as well as the challenges that come with it, such as identifying the right ones and tracking Marketing technology startup Vfluencer their performances.

In particular, he feels that there is a offers a platform that helps companies search for and manage micro-influencers “unique” demand for KOLs in Hong Kong as the region has become a hub in Hong Kong and China. The platform for overseas brands who wish to tap the features a Key Opinion Leaders (KOL) discovery engine that enables marketers Chinese market.

In January, the firm raised $3.92m to identify micro-influencers and (US$500,000) in a seed funding, led by organise their campaigns. The platform Betatron. turns a profit by connecting such Siu said that the proceeds will be used influencers on sales commission. to expand to China and they even have “We’ve got a proprietary system that recently launched a specific version of scraps public data from different social the platform that caters to the China media platforms 24/7 and use AI to market. analyse their social media content and “[Expanding to China] is the right time recommend influencers that can reach and affect their potential customers most now because we see the rise of microinfluencers happening at the moment.” effectively. We also use data analytics

10

HONG KONG BUSINESS | SEPTEMBER 2019

Wizpresso’s research platform brews instant data for analysts

Whenever analysts and investors would like to compare companies’ store counts and monthly sales, they would have to find these figures manually from annual reports and websites. The tech startup Wizpresso takes this pain away as its platform helps its clients collect, benchmark, and analyse operational and alternative data online.

Its platform uses proprietary machine learning algorithms with search engine searches across public filings of listed companies in Hong Kong, China and the US. “Our document filing search was a product of our customers complaining to us how they waste hours every week doing ‘Ctrl+F’ across public filings,” said Calvin Cheng, founder and CEO of Wizpresso. “We started the business when we, as bankers, realised there must be a more efficient way to circumvent manual research work, specifically around operational and alternative data.”

In addition, he stated that companies have no obligation to release substantial operational or alternative data, data collection, benchmarking and analysis, which makes the task harder to accomplish.

They chose to focus on operational and alternative data alone as its fragmented nature gives off an impression to aggregators that it requires higher data costs and effort. Cheng said that the subscription price for its platform is the same as the price of having a cup of coffee a day.

“Wizpresso symbolises a pure dose of wisdom that can be consumed every day, like an espresso.

We wanted customers to see us as the invisible ‘data wizard’ for their teams; we imagine ourselves to be our customers’ colleague who could finish the work within the time of a cup of coffee,” Cheng continued. *subhead* Last March, Wizpresso raised $2m in seed funding.

Cheng said that they plan to use this to expand their product offering, offer stronger customer support, and increase team size.

“We iterate and publish new versions almost daily because of the amount of customer engagement and feedback,” Cheng added. “We thrive on customer feedback, because it makes our products incredibly sticky. We do not want to be the research product that sits in the back and collects revenue with no engagement. On the technical front, we will remain committed to developing more proprietary technology and methods to help our clients focus on what they do best.”

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FINANCIAL INSIGHT: PRIVATE EQUITY

Tech, real estate deals buck decline as Chinese deal appetite falls Exits are becoming tougher and investors have no choice but hold onto assets as returns decline.

P

rivate equity investors are still eager to bankroll real estate and venture capital deals despite growing fears of an asset bubble. This year alone saw megafunds pouring in hundreds of millions into local startups— logistics company Lalamove raised US$300m in a Series D funding round in February, followed by a US$225m Series D round by travel booking app Klook in April.

“While private equity remains a core part of investors’ portfolios, 2019 presents a number of challenges in the market,” says Rajindar Singh, subregional director APAC, private equity, real estate & capital markets at TMF Group.

“We are seeing liquidity tightening in China and there is the ongoing trade conflict with the US to contend with.

There are also valuation concerns; this is putting pressure on General Partners (GPs) to generate future returns to meet investor expectations. There could be a degree of market correction this year, which could impact some PE funds.”

A survey by Bain Capital shows that 85% of private equity investors focused on Greater China consider it difficult to evaluate new-economy companies, mainly because traditional PE valuation techniques do not work in that market and because it is difficult to justify investing in loss-making businesses. More ominously, the survey shows that 65% of general partners see a high to very high

Investor appetite for China private equity dropped drastically last year and there was a move into USDdenominated funds intead of the usual RMB ones.

GAW CAPITAL PARTNERS ACQUIRED CITYPLAZA THREE AND CITYPLAZA FOUR FOR $15B. 12

HONG KONG BUSINESS | SEPTEMBER 2019

risk of a bubble bursting in the coming years, although players have been striking deals in defensive sectors.

“We note that the bigger private equity deals in Hong Kong in 2019 to date appears to be mostly real estate related. Hengli Investments Holding (Group) Ltd. and real estate PE firm Gaw Capital Partners acquired Cityplaza Three and Cityplaza Four from Swire Properties for $15b, and Gaw Capital Partners also acquired 12 Shopping Centers in Hong Kong from Link REIT for $12.01b,” noted Yvette Chan, managing director and Asia M&A tax practice leader at Alvarez & Marsal. “Further, Blackstone acquired Hong Kong International Construction Investment Management Group Co. Ltd from HNA Group for $7.02b, and Weave Co-living, backed by the US PE firm Warburg Pincus, acquired a serviced apartment complex at 123 Queen’s Road West in Hong Kong for $585m.”

Brewing trouble Investing in Internet and tech startups is no sure bet, especially as investors move their money away from the second largest economy. “Investor appetite for China private equity dropped drastically last year and there was a move into USD-denominated funds instead of the usual RMB ones,” Ee Fai Kam, head of Asian operations at

TRAVEL BOOKING APP KLOOK RAISED US$225M IN A SERIES B ROUND THAT SAW PE FIRMS PITCHING IN.

FINANCIAL INSIGHT: PRIVATE EQUITY higher than when I first invested. So it is not just about economic size but future growth.”

PE Deal Flow of Companies Based in Hong Kong

Source: PitchBook

Preqin told Hong Kong Business.

A report from Bain Capital warned that, “China’s overheated new economy has produced a surge of speculative investment in Internet and tech companies—a bubble waiting to burst.”

Internet and technology deals already are wildly overpriced compared with other sectors. At 31 times EBITDA, median M&A deal multiples for Chinese Internet and tech companies are twice as high as those for other industries in Greater China, and 2.4 times greater than the median multiple for Asia-Pacific deals in 2016–2018, the report showed. “That’s a warning signal for investors, and funds’ recent performance underscores the danger. China’s new-economy returns are in free fall: Median return multiples dropped to less than 2.0 times in 2016–18, from 4.7 times in 2014–15,” the report noted.

Data from Bain Capital shows that PE funds have acquired more than 1,000 Internet and technology companies in Greater China with a value of $10 million or more over the past five years. However, only about 130 firms were divested in the same time frame.

Companies that went public between 2017 and 2018 had lost, on average, 21% of their initial market capitalisation 12 months post-IPO. And the losers lost big: 62% of companies that went public shed more than 30% of their value. These include financing platforms Qudian Inc and PPDai Group Inc, whose values crashed by 55% and 48%, respectively, barely a year after going public. “That trend means viable exit opportunities are scarce,” Bain Capital said in the report. “By contrast, companies that went public between 2015 and 2016 gained an average of 105% in value in the first 12 months after the IPO. Only 7% lost more than 30% of their value. As the IPO market softens and return multiples drop, funds that overpaid for companies in their portfolios see no alternative but to hold onto assets.”

But there are still many success stories where startups are concerned. “When I first invested in Baidu in 2000, China was 8x smaller than the US. So whatever the value of the equivalent search engine in the US, China could only sustain one eighth of the value,” said Dr. Finian Tan, founder of Vickers Venture Partners, speaking to Preqin.

“But when you compute the future growth of China, the numbers become larger. That is what has panned out for Baidu, which is worth almost $100b today, over 3,000x

Ee Fai Kam

Finian Tan

Rajinder Singh

Doris Yee

Yvette Chan

A tale of two exits On the surface, exit data seem promising: Asia-Pacific exit value hit a record high of US$142b in 2018, up 39% over the past five-year average. This far outpaced the previous all-time high of US$125b in 2014, led by deals in China, India and South Korea.

However, the total number of exits plunged by more than 50%. Big-ticket deals of US$1b or more made up 58% of the total exit value, and the average exit value doubled sharply. “Perhaps most worrying, the region’s private equity market has become sharply polarized between large funds with strong track records that dominate activity across the region, and smaller, less experienced funds that are having difficulty raising funds and exiting. The impressive headline figures for the Asia-Pacific PE market in 2018 mask the emergence of a winner-take-all dynamic,” Bain Capital reported.

Over in Hong Kong, Preqin’s Ee noted that Chinese private equity investors tend to prefer to exit through an IPO on offshore stock exchanges. “The main reasons are transparency, liquidity and also divestment rules after lock-up period in HK. The listing regulation in HK is also in favour of start-ups and technology firms after a listing regime for weighted voting rights was introduced.

The existence of Shanghai/Shenzhen connect also allows overseas investors to trade securities listed on the mainland via HK stock exchange,” he said.

“As the performance of China stock market is lower than expectation last year and the Hong Kong listing rules introduced the dual class share structure last year, we note that many PE-backed firms have chosen to exit via Hong Kong IPOs,” Chan of Alvarez & Marsal said, referring to the reform that kicked into effect on April 2018 allowing weighted voting rights and giving company founders and insiders more control. “However, there are also increasing trends of exits via secondary sales to other PE sponsors,” she cautioned.

“Making profit purely based on a “buy low, sell high” strategy is no longer as effective as previous years in view of the increasingly higher valuation. Many PE sponsors are therefore starting to place more focus on improving operational performance in order to increase the value of the invested companies, thereby obtaining a higher valuation upon their future exits,” Chan explained.

One prominent exit made last year was FTLife Insurance Company Limited’s trade sale exit, where NWS Holdings agreed to acquire the entire issued share capital of FTLife Insurance Company Limited from JD Capital for $21.5b in cash. Other notable exits last year include the sale of Wharf T&T to Hong Kong Broadband Network by TPG Capital and MBK Partners at a US$1.3b enterprise valuation.

Partners Group also sold Hong Kong garment label maker Trimco to Affinity Equity Partners for US$520m.

“Hong Kong has benefitted from greater economic integration with the mainland over the years e.g. HKHONG KONG BUSINESS | SEPTEMBER 2019

13

FINANCIAL INSIGHT: PRIVATE EQUITY Public-private deals gain traction

Source: Bain Capital

Shanghai/Shenzhen stock connect, freer flow of talent and the latest Greater Bay Area initiative. The physical proximity of HK to Shenzhen, one of the VC hubs in the mainland, also means that HK-based managers are close to their investees,” Ee noted.

Over 100 boutique private equity firms closed down in China in 2018, squeezed by a regulatory crackdown that limited their access to capital.

higher valuation as Chinese state-owned enterprises are generally less price sensitive than PE sponsors,” Chan said.

“In my view, the best way for an institutional investor to invest in technology is to look for the top-quartile VC firms that are still open and invest in all of them quickly as they will not be open for long. And once you get your foot in the door, you can continue to invest in these VCs for decades. Because of the halo effect, these VCs will continue to perform for decades too,” Tan said.

According to the 2019 Preqin Global Private Equity and Venture Capital Report, the share of total capital raised by Asia-focused funds in 2018 was just at 19%, six percentage points lower than in 2017, marking the region’s smallest market share since 2013. Funds focused on North America and Europe, however, saw their share of total capital increase by four and two percentage points respectively over the same period.

“Venture capital is a very unusual asset class, as it is the only one in which the average performs very well, but the median loses money. The reason for this is because performance varies greatly: the top quartile makes a huge amount of money and the remainder of the market wallows. This is due to something called the ‘halo effect.’

The best VCs attract the best deals and what is left goes to the next rung of VCs,” Tan explained.

Calling the shots Large firms are in a better position to ride out the storm.

Data from Bain show that, on average, experienced funds larger than US$1b needed only seven months to close, and they met or exceeded their targets. For example, PAG Asia All eyes on ASEAN Capital raised a US$6b fund in 2018, exceeding its US$4.5b As a result of greater uncertainty in the Chinese market, goal. Similarly, Bain Capital raised its US$4.65bAsia IV fund more fund managers are setting their sights on Southeast in six months, exceeding its US$3.5b target.

Asia. “Several global PE fund managers have raised By contrast, smaller and newer funds had a much harder multibillion-dollar pan-Asian funds on the back of time raising capital. Funds that raised less than US$1b successful track records in China,” noted Doris Yee, required an average of 16 months to close, and new funds director of the Singapore Venture Capital Association, in a needed 27 months. Only 39% of smaller funds reached or report by Preqin. exceeded their fundraising targets. Data from Preqin show “ASEAN has long-term attractiveness because of reasons that the 10 largest funds which accounted for 35% of total like demographics, geographic importance to sea trade capital raised 34% of the total capital raised in 2018, whilst the routes and greater intra-ASEAN economic cooperation. average size of funds closed rose to US$496m.

But we expect the short term benefits that ASEAN is “The fundraising environment for emerging managers reaping from the US-China trade tensions to be short is ever more challenging. As investors look to established lived,” Ee said. Chan also observed that many regional brands amid market uncertainty, capital concentration PE funds are expanding their investments into Southeast increases,” the report noted.

Asia, in particular Singapore, Vietnam, Indonesia and “If people have worked for global PE groups and chosen Malaysia, due to heightened US-China trade tension and to spin off and set up on their own, even if they were high valuations in China. well-known when working at that global manager it’s not guaranteed they will be successful. Some managers launch and close down within a year or two. It shows that the Deal values rose even as deal count fell in 2018 platform, the team, the historical returns and the track record are key attractions to potential investors,” Singh noted.

Slowing down In Mainland China, over 100 boutique private equity firms closed down in 2018, squeezed by a regulatory crackdown that limited their access to capital. Recent growth in the number of China-based firms has increased the size of the Asian private equity universe to 4,674 firms. China-based fund managers account for 67% of all private equity firms in Asia. China is home to 3,108 firms, which is almost the same number of firms as Europe (3,518).

“The market has become increasingly competitive with 14

HONG KONG BUSINESS | SEPTEMBER 2019

Source: Bain Capital

INDUSTRY INSIGHT: POWER market for cost competitive LNG supplies.” It added that it expects that natural gas generation in its overall fuel mix will increase to ~70% by 2023 from ~30% at present.

The government is introducing more renewables into its energy mix.

How power players are reducing reliance on coal Through a joint venture, HK Electric and CLP Power are building an offshore LNG terminal as part of plans to import LNG for the first time.

P

rogress is underway for Hong Kong’s first offshore LNG terminal, a joint venture between Castle Peak Power Co. (CAPCO), which is owned by CLP Power, and Hong Kong Electric Co. (HK Electric) after the JV inked an agreement with Japan’s Mitsui O.S.K for the charter of a Floating Storage Regasification Unit (FSRU) for 10 years in June.

Hong Kong is fine-tuning its plans to import LNG for the first time as part of an effort to reduce reliance on coal and lower carbon emissions.

The efforts to develop LNG import capabilities are spearheaded by billionaires Li Ka-Shing, who owns a 33.37% stake in HK Electric via his utility firm Power Asset Holdings, and Michael Kadoorie, owner of the city’s biggest electricity firm CLP Group, which holds a 70% stake in CAPCO, according to Fitch Solutions, which identifies Myanmar, the Philippines, Vietnam and Australia as amongst those who are expected to import the fuel for the first time alongside Hong Kong.

“The current prolonged downturn in spot LNG prices, next to projected 16

HONG KONG BUSINESS | SEPTEMBER 2019

Customers are incentivised to install solar photovolatic or wind power systems at their premises for selling their renewable energy output at rates ranging from 38-64 cents per kWh

ample supply over the next few years, makes it more palatable for Hong Kong to partake in LNG trading for the first time,” Fitch Solutions said.

“The wide array of supplies available, coupled with market’s embracing of greater flexibility and diverse pricing exposure in LNG contracts, also lowers risk and increases leverage for buyers, such as Hong Kong, during negotiations with suppliers.”

HK Electric echoed this positive sentiment. “Natural gas will become the primary fuel for our power generation. The new offshore LNG terminal project will enable us to mitigate fuel supply risk and to have direct access to the international

Renewables push The government is also targeting more renewables with the introduction of feed in tariffs (FIT) for renewables installations.

Under the FiT scheme, customers are incentivised to install solar photovoltaic or wind power systems at their premises for selling their renewable energy output at rates ranging from 38-64 cents (HK$3- 5) per kWh. “Since the launching of our FiT Scheme in August 2018, the market response has been positive.

We also observe that the PV industry has been much stimulated with the number of PV companies and practitioners participating in the local RE market substantially increased,” HK Electric said.

Since it opened applications in May 2018, CLO Power has received over 2,500 applications by endMarch 2019. “Around 83% of the applications have been approved, and so far, 234 applications have been completed and are successfully connected to our grid to enjoy FiT. Despite the operational challenges, CLP endeavours to do everything possible to support the development of RE in Hong Kong,” it said.

HK Electric expects that the local RE market will grow and the number of distributed grid-connected RE systems on customer side will increase notably. “At the end, a vibrant RE market will help further decarbonise local power sector and help Hong Kong combat climate change,” it said.

Hong Kong - % share of electricity generation

Source: Fitch Solutions

ANALYSIS: CO-LIVING

Weave Hong Kong

Co-living takes off in costly Hong Kong amidst robust millennial take-up Meteoric residential property prices are part of the reason the shared space concept has gained momentum in the space-starved city, as millennials drawn to the appeal of communal living embrace the concept.

W

hilst companies are renting co-working spaces and travelers are communing through ride-sharing apps, young millennials are now sharing their living space with each other. Ranked as the top global consumer trend for 2018 by Euromonitor, the concept of co-living is a form of short-term housing where residents share living space and also a set of values. It taps into the urban millennial market, offering flexibility, fully-furnished space, and a social network for tenants to live with others of a similar age, experience and mindset.

Sky-high rents and prices are one of the key demand drivers for co-living. According to Savills rental index, rents in Hong Kong have more than doubled, from 94.3 in Q1/2009 to 196.7 in Q1/2019, while our price index has skyrocketed from 154.0 in Q1/2009 to 479.3 in Q1/2019, reflecting poor local housing affordability.

A 2019 Demographia Report meanwhile revealed that the Hong Kong housing market is the least affordable among 309 markets with a house price-to-income ratio of 20.9. Things are not much better on the public housing front, where the average waiting time has risen to 5.5 years. It is therefore no surprise that young millennials are now searching for cheaper alternatives 18

HONG KONG BUSINESS | SEPTEMBER 2019

Ranging from $3,500 - $20,500, co-living rents are usually inclusive of all utilities with common areas, a shared pantry, laundry facilities and free wi-fi.

in the private rental market. Co-living seems like an obvious choice if you are willing to share living space in order to save money on rent.

Apart from housing affordability, social trends playing out in the new generation are also contributing to increasing demand for co-living. Young millennials, especially entrepreneurs, are a social generation who want to be part of a community. They are happy to live among their peers, and exchange ideas and knowledge with each other. Apart from them, young expats from overseas and the mainland also like the opportunity to meet new people when they first come to stay in the city.

Tenant benefits From a tenant perspective, co-living provides three elements - convenience, community and connectivity.

First, rents are usually inclusive of all utilities, with common areas, a shared pantry, laundry facilities, and free wi-fi , ranging from $3,500 to $20,500 per month.

Rooms are fully furnished, and a basic room cleaning service is provided. Secondly, tenants can participate in a range of activities such as game nights or community volunteering organised by the landlord. Some operators in the US and UK such as WeLive (the residential

ANALYSIS: CO-LIVING SINGAPORE VIEW

Comparative analysis of co-living operators in the city

Where foreigners find a home

Source: Savills

offering from WeWork), Common and The Collective even offer supermarkets and restaurants. This all helps to create a sense of community for the tenants who live in the property. Lastly, co-living operators are usually located near MTR stations.

Landlord benefits From a landlord perspective, co-living provides a higher yield than traditional leases. Investors are also able to extract extra value from old tenement buildings with a low utilisation rate. The most common strategy is to transform residential buildings and service apartments into co-living properties as minimal alterations are required. In 2017, Synergy Biz spent $150m to transform two five-storey buildings into a co-living place, providing 166 bed spaces in 15 units with a monthly rent starting from $3,500.

Eton Properties has converted an upmarket property (Woodland Villas) which includes 18 flats of 1,600 sq ft each, renting at $98,000 per month, to a co-living space (Mini Ocean Park Station) to provide 270 units of 80 - 200 sq ft. each charging a monthly rent starting from HK$7,600. Some investors have looked at budget hotels or guest houses in non-core areas. For example, Ovolo Hotels has converted a hotel in Aberdeen into a co-living space named Mojo Nomad in 2017, providing 65 rooms and more than 250 beds. Weave Co-living, opened in the summer of 2018, has reconfigured a 13-storey hotel in Prince Edward to provide 160 rooms, and achieved a 95% occupancy within three months of opening. In 2019, they acquired a second property in Hung Hom providing 100 bedrooms.

In the case of industrial buildings, conversion is more difficult because of various technical requirements. Some GFA would have to be sacrificed to put in lighting and ventilation, sanitary fitments, plumbing and drainage systems in order to comply with the Fire Safety, Building Ordinance and related legislation. However, as the government is encouraging developers to renovate old industrial buildings and provide transitional housing, it is worth investors keeping an eye on this type of property, especially in manufacturing districts where urban revitalisation is happening. From Savills Hong Kong’s CoLiving: A Promising Asset Type report

From a landlord perspective, coliving provides a higher yield than traditional leases.

Investors are also able to extract extra value from old tenement buildings with a low utilisation rate.

Most co-living facility users in Singapore are willing to pay a premium of up to 10% more to stay in a co-living facility as compared to a normal lease apartment, according to a report by JLL. For existing users, 25% were even willing to pay over 20% more.

The co-living market in Singapore saw unprecedented activity over the past 12 months with millions of dollars of funds being pumped into operators, enabling them to embark on an expansion spree, the report highlighted.“Even the government recognises its benefits and has awarded a site in one-north through JTC for a purpose-built co-living facility,” Tay Huey Ying, head of research and consultancy at JLL Singapore, and Michelle Tee, director of research and consultancy, said in a report.

Demand is being driven primarily by Singapore’s foreign population, which stands at 1.6 million, excluding construction and foreign domestic workers, particularly from single-household expats engaged on a contract basis or working on project assignments in the city-state. The one-stop services offered by co-living operators provide expats with an alternative accommodation option that is said to be simpler than renting a conventional room and cheaper than renting a serviced apartment or hotel.

Achieving scale Co-living players in Singapore typically operate an asset-light leased model, wherein operators lease bare residential units or an entire block from a landlord, retrofit them to sub-lease individual rooms to co-living residents. According to JLL, this model allows operators like Hmlet to scale up fast.

In contrast, the business model of lyf is a mix of an owner-operated and management contract basis. Their first co-living facility in Singapore, lyf@SMU, is a Living Lab at the Singapore Management University (SMU) which serviced residence operator The Ascott has coinvested in and co-managed with SMU. “For lyf’s upcoming facility at Funan Singapore, The Ascott, through its serviced residence global fund with Qatar Investment Authority, has reportedly paid $90.5m to CapitaLand Mall Trust to acquire land for the serviced residence component, and will spend an estimated $80m to develop lyf’s flagship co-living facility in Singapore,” Tay and Tee said. The Ascott has also won a management contract from developer Low Keng Huat to manage lyf Farrer Park Singapore which is expected to be completed in 2021.

Willigness to participate in shared communities

Source: JLL

HONG KONG BUSINESS | SEPTEMBER 2019

19

One in every four people in Hong Kong is a Manulife customer and we have many opportunities to cross-sell and up-sell our offerings to fulfil their evolving insurance and investment needs.

Guy Mills CEO Manulife Hong Kong| SEPTEMBER 2019 20 HONG KONG BUSINESS

INTERVIEW

How Manulife is breaking growth ceilings in rapidly ageing and costly Hong Kong Customer satisfaction is quantified at Manulife which puts the customer at the centre of everything it does.

T

he view from the top is looking good for Manulife.

After 120 years in Hong Kong and growing its customer base to over two million, the insurer has garnered more than enough firepower to zoom past its global rivals and hold a market-leading position in the city’s retirement scheme, Mandatory Provident Fund (MPF), with a market share of 23.1%.

Despite its success in cracking the Hong Kong market, Guy Mills, CEO of Manulife Hong Kong, is refusing to let up as he leads the firm to unlock new pockets of growth, a feat made especially more difficult against an already mature insurance landscape that saw total gross premiums grow by 8.3% to HK$489.17m in 2018. Where others see challenges, Mills only sees opportunities especially against a backdrop of an ageing population and rising medical costs.

In an exclusive interview with Insurance Asia, Mills shares the secret to their success and strategies to move forward.

What initiatives of Manulife Hong Kong do you plan to introduce and enhance as CEO? The voice of the customer now permeates everything we do. When developing a digital product or service, we now deploy what we call the “Agile” approach where we keep creating different prototypes in short development cycles and ask customers for feedback to improve on the next prototypes. In this way, end users’ feedback can be fully and constantly plugged back into the development cycle, enabling us to deliver an end product that closely aligns with customer requirements by the time it’s launched. The eClaims solution launched in 2018, for example, was built using this approach.

The Net Promoter Score (NPS) that we have set up is an important initiative that measures how happy a customer is with our interaction and service. Through this system, we have seen there are 50% more happy customers with eClaims than with paper claims. NPS is now an integral part of the matrix through which we measure our success.

There are various customer listening sessions where we can hear real customer conversations and discuss how we can address their pain points and concerns.

The Voluntary Health Insurance Scheme (VHIS) was launched in April to take strain off the public healthcare system. How do you plan to promote adoption?

Hong Kong’s public healthcare system is outstanding, but it is under strain. Medical costs are rising, and in-patient bed occupancy rates at public hospitals hit 88.8% in 2017, and long waits for specialist care have unfortunately become the norm. VHIS will be a game changer in this complex environment. The scheme’s transparency and tax benefits make it all the more attractive to many. In a recent Manulife survey of working-age Hong Kongers, over half of respondents expressed interest in purchasing VHIS. About

60% of respondents with dependents also said they are considering buying VHIS products for family members, since premium expenses are tax-deductible.

Manulife is ideally placed to help customers sign onto VHIS. As Hong Kong’s No.1 insurance brand and a top three medical insurer in terms of new business, we have a large pool of customers and deep expertise in medical insurance. Our Manulife Shelter VHIS Standard Plan and Manulife First VHIS Flexi Plan are designed to meet different customer needs. Our 8,700-strong agency force and distribution partners are proactively reaching out to customers to help them choose the right VHIS solution.

The insurance sector in Hong Kong has not been exempt from the digital wave that has seen the city issue the first digital-only insurance license in December. What initiatives are you embarking on to ensure that you remain competitive against heightening fintech threats?

Our Hong Kong customers have told us that speed, simplicity and human touch are all important. Our eClaims solution – claimsimple.hk – was developed with this in mind, and we are very pleased with the fast pick up of usage. Within a year, about 50% of eligible claims are being submitted through this platform. The success of eClaims in Hong Kong has led us to export this fintech solution to our operations in Japan and Vietnam.

In tandem with the launch of our tax-deductible solutions, we rolled out our first online sales platform – BuySimple.hk. On this new site, Hong Kong people will be able to buy our VHIS Standard Plan, with quotes calculated in less than a minute, and open an MPF TVC account directly. They can also access our purpose-built Tax Savings Calculator to estimate their applicable tax breaks under VHIS, TVC and QDAP. Whilst digital channels like BuySimple.hk are increasingly vital for us to serve our customers, we never lose sight of the importance of human touch throughout the customer journey – from needs analysis to buying insurance and making more complicated claims.

The Net Promoter Score (NPS) that we have set up is an important initiative that measures how happy a customer is with our interaction and service.

With a developed life insurance market whose life and health insurance premium to GDP ratio trails only behind Taiwan, what kind of improvements is Manulife Hong Kong introducing -- both tech-wise and operations-wise -- to grow its client base?

In terms of technology, we are making great progress in digitising the customer experience on all fronts to make our services simpler, better and more convenient. Further to our eClaims solution, the new BuySimple.hk sales site is another case in point. Business-wise, one in every four people in Hong Kong is a Manulife customer and we have many opportunities to cross-sell and up-sell our offerings to fulfil their evolving insurance and investment needs.

HONG KONG BUSINESS | SEPTEMBER 2019

21

RETAIL WATCH has also been making it easier for retailers to enter its massive market by reducing consumption tax and valueadded tax, lowering the sales tax for some categories, and introducing a new e-commerce law.

Decathlon’s massive store at Tseung Kwan O

Retailers turn to experiential selling to combat sales slump Brands are urged to enhance their online platforms in an effort to sustain the connection with customers long after they have left the store.

E

xperiential retail is gaining ground in Hong Kong as can be seen in French sporting goods brand Decathlon’s 36,000-sqft retail store at Sheung Tak Plaza. Upon entry, shoppers are ushered into a free bicycle workshop space where they can customise and repair their bikes and enjoy an in-store online catalogue where they can browse up to 13,000 products. Moreover, the space features daily experience-sharing sessions and sports classes with local athletes, and the company is taking the shopping experience even further with plans to transform parts of the store into a campsite replicating the famous hiking trails of Hong Kong.

Over at Cheung Kong Center, an augmented reality mirror allows customers to virtually try on cosmetics and other products and see its effects. They can also take photos and share it with their friends.

The adoption of strategies emphasising a unique customer experience is part of larger trend in Hong Kong where brands use virtual reality (VR) and augmented reality (AR) technologies. Against an environment where retail sales have 22

HONG KONG BUSINESS | SEPTEMBER 2019

China has been making it easier for retailers to enter its market by reducing consumption and valueadded tax, lowering the tales tax and introducing a new e-commerce law.

progressively declined since February, retailers are called to adopt these emerging technologies to appeal to these new types of shoppers.

Fading appeal The decline in Mainland spending is one of the biggest threats to the sector’s future. Once the industry’s main growth engine, consumer sentiment of Mainland tourists have waned in recent months in a reflection of heightening macroeconomic uncertainty.

“The retail market definitely is not very promising, to be quite honest, because China is also trying to regain this market,” Michael Cheng, Asia Pacific and Hong Kong/China consumer markets leader for PwC, told Hong Kong Business.

AlthoughHong Kong still enjoys the advantage of being a shopping haven due to its duty-free tax policy, China is also stepping up its game.

“Most multinational brands [usually] come to Hong Kong as their first step to build their reputation among Chinese consumers, but now some of the retailer brands are going directly to China,” he said, adding that China

Tech-powered retail Cynthia Ng, director of retail sales at Colliers, advised retailers to tell a brand story; to be more creative, niche and authentic with their product offerings and shop design; and to invest in social media marketing. Terence Chan, senior director of retail at JLL, suggested giving incentives and loyalty programmes to maintain shoppers with benefit, as well as considering consolidation/costefficient relocations based on the sales performance of the stores.

Retailers are also advised to invest more on e-commerce, which had been largely ignored for the last decade. In 2019, Statista reported that Hong Kong’s e-commerce market is worth $37.39b with an expected annual growth rate of 7.9%, whilst the average revenue per user is $6,681.8.

“Although tourists still come to Hong Kong to shop physically, local retailers need to try to retain the connection with these customers after they have left so that they can continue to give them new messages and different kinds of offers,” said Cheng.

Cheng also said that retailers partner with key opinion leaders (KOL), who wield much influence among their followers. “One of our clients who sells jewelry in China has a product line that did not generate much excitement when it was first launched. But when one KOL promoted the products on her website, the product suddenly sold like crazy,” Cheng said. “That line of marketing strategy is very powerful.”

However, retailers shouldn’t ignore the value of brick-and-mortar stores over e-commerce, as these two go hand-in-hand: brick-and-mortar shops maintain brand exposure whilst e-commerce enhances the shopping experience by forging long-distance connectivity to shoppers as well as nurturing the brand name with the more digital-savvy generation.

Frances Gagua

COVER STORY

Malls located near residential areas are in Source: Gaw Capital Partners

Neighbourhood malls and flex spaces prop up weakening property market With market yields that rank ahead of other property asset classes, lesser-known neighbourhood malls are cashing in from a more stable source of income and product mix, scoring 68% of retail investments in 2018.

A

s the freewheeling days of the Hong Kong property market come to a close, the office segment is gradually proving to be a resilient asset class in the ongoing downturn especially as decentralisation continues to gain momentum.

With Central holding the title as the world’s priciest office market at around $2,641 psf in rental costs eclipsing that of New York’s Midtown and London’s West End - cash-short tenants are increasingly considering more cost-efficient alternatives for their office needs. In fact, a study by Colliers found that two in five (41%) office occupiers across the island considering relocation upon their next lease termination.

“Grade-A office market, leasing momentum in Central has been dampened by market uncertainties while Kowloon’s leasing market is relatively active,” David Ji, director and head of research & consultancy for Greater China and Hong Kong at Knight Frank, told Hong Kong Business.

By submarket, Island East occupiers have expressed more likeliness to relocate. This, according to Colliers International, could be reflective of the fast rental growth over the last few years, which has provided cost-conscious companies with an incentive to move. On the other hand, 24

HONG KONG BUSINESS | SEPTEMBER 2019

David Ji

Denis Ma

occupiers in Kowloon and the New Territories expressed that they are more likely to remain in their present location, reflecting their satisfaction in the area given more affordable rents and limited options for cheaper locations.

Average rents in Kowloon and the New Territories have only edged up a mere 4.7% and 1.4%, respectively, in the last three years—the same time it took for average rents in Hong Kong Island to jump 14.3%, data from Colliers show, indicating a wide rental gap.

Those with relocation plans said that they want to move within the same district (54%) or relocate to other districts (46%), whilst some said that they prefer to relocate to the core CBD areas of Central and Admiralty (21%). The study noted that tenants currently staying in the fringe CBD (Sheung Wan/ Wan Chai/ Causeway Bay) have indicated plans to relocate to the core CBD. Kowloon East is another popular location option amongst occupiers with relocation plans, with half of that relocation demand coming from outside the Kowloon East submarket.

To lure tenants, landlords have been turning to additional on-site amenities, according to Colliers.

“Landlords offering the facilities in greatest demand should attract anchor tenants into their properties,” the firm said. Meeting rooms or event venues, gym rooms or

COVER STORY cafés and green buildings facilities have emerged as the top three amenities which catch the attention of occupiers.

The new CBD? Resident CBD tenants have started to set up headquarters in Island East, thanks to the Central-Wan Chai Bypass trunk road and its traffic-light-free long tunnel which slashes travel time from 15 minutes to five minutes. Big ticket names like Facebook, EY, and Baker McKenzie have taken the lead in setting up shop in Island East and even the Securities and Futures Commission is reportedly relocating from Central to Quarry Bay. “These relocations demonstrate companies are increasingly paying attention to Island East over Wan Chai/Causeway Bay. With the travel time from Central being slashed dramatically, Island East’s strengths as a relocation destination with high quality offices and low rents are revealed,” Colliers International said in a report.

Furthermore, the decision by large corporates to open their headquarters in the area should help cement Island East’s as a leading business hub for companies from the professional services, TMT, insurance and financial sectors, which form the most important business sectors in Hong Kong.

Office supply in Island East is set to witness rapid growth with 1.7 million sqft GFA of new office space set to come online by 2022, Colliers data show. This will account for 57% of the future supply on Hong Kong Island over the next three years. “In North Point, K11 ATELIER King’s Road from New World Development and 218 Electric Road from Henderson Land, are set in to bring an additional 500,000 sqft of Grade A office space to the area in 2019. As Island East becomes more competitive, its rental level should eventually catch up, narrowing the gap with other districts on Hong Kong Island. CBD tenants who remain hesitant should make a bold move before the rental savings diminishes and the availability of space in Island East disappears,” the research firm noted.

Island East’s well-established Grade A office portfolio and the prestige of being located on Hong Kong Island have been the area’s two major advantages over Kowloon East. Furthermore, despite the similar number of licensed restaurants and similarly sized retail market, the population density in Island East is only half of that in Kowloon East.

This lower density provides Island East a better opportunity Office tenants movement (outflow)

Source: CBRE

Grade A Office Occupancy Structure - Mainland firms

Source: CBRE

These relocations demonstrate companies are increasingly paying attention to Island East over Wan Chai/ Causeway Bay. With the travel time from Central being slashed dramatically, Island East’s strengths as a relocation destination with high quality offices and low rents are revealed,

to focus on office development and establishing a sophisticated business community.

Kowloon is shaping up to be one of the frontrunners for the next Central especially with the widelyanticipated commercial site that will open on top of the West Kowloon Express Rail terminal. With area of approximately 5.96 ha, the site will be home to three office towers providing up to 3.21 million sqft, with 2.8 million of office space, making it bigger than the International Financial Centre complex (2 million sqft) and the International Commercial Centre (2.3 million sqft). The commercite site is not just the largest in the 2019-2020 land sale programme, but also the largest of its kind in recent decades, a report from Knight Frank show.

With lower rental costs, the tenant mix in Kowloon has changed. Where financial firms once avoided the area, only looking to it to house its back-up operations, more companies have decided to relocate their Hong Kong Island front office to Kowloon. In 2016, banking and finance accounted for just 26.58% of major occupiers in the central part of Kowloon, a figure that rose to 35.23% in 2018 as the area now counts Citibank and JPMorgan amongst its big-ticket tenants, data from Knight Frank show. In TST, more Japanese and Taiwanese banks are also expanding their front-office operations.

Co-working boom Hong Kong has seen the expansion of coworking spaces, as the total space occupied by the sector in 2018 expanded 35% to 613,000 sqft of the 1.62m sqft of total office gross take-up space in the island, data from Colliers show. Moreover, a record 900,000 sqft of new flexible workspace has been transacted. With 150 centres all over the island, an average desk costs $946 per month (US$121), a lot lower compared to the $5,790 (US$741) psf per annum average Grade A rent in one of the world’s most expensive property market. That said, the price tag is still higher compared to the $664 (US$85) average coworking desk rate in Singapore.

“The overarching trend was landlord sentiment softening towards flexible workspace. Whilst landlords remain conservative, most major landlords are now open to leasing space to the right operator, with Hysan, Sun Hung Kai and Swire Properties all increasing their HONG KONG BUSINESS | SEPTEMBER 2019

25

COVER STORY Distribution of Grade A Office Co-Working Centres by submarket

Source: CBRE

exposure to flexible workspace over the year,” said Sayaka Matsumoto, Hong Kong associate director at Colliers International.

Amongst flexspace operators, US-based WeWork has been the most aggressive in growing its portfolio after securing spaces in four new locations in Hong Kong alone —an 84,000-sqft space in LKFT Tower in Central, a 60,200-sqft space in Lee Garden One at Causeway Bay, a 54,000-sqft space at Cityplaza Three in Taikoo Shing, and a 32,866-sqft space in Hysan Place at Causeway Bay. In total, WeWork occupies a total of 505,000 sqft in Hong Kong by the end of 2018, data from Colliers revealed.

On its part, local operator Campfire added two locations in Quarry Bay, expanding in their Wong Chuk Hang location and securing a new multipurpose space in Hung Hom. Another local player, Garage Society, added two locations in Sheung Wan and Wan Chai.

Similarly, The Executive Centre sealed its place as the leading premium operator in Hong Kong by adding Prosperity Tower and Champion Tower to their portfolio.

Other premium operators are also trying to disrupt the market, including The Great Room which entered Hong Kong with a lease of one floor in Swire’s flagship development One Taikoo Place, and PRC operator Atlas which opted to set up their first location in West Kowloon, taking up space in Gateway.

There are an estimated 10 to 15 other major coworking players across Hong Kong, with close to 50 smaller operators running similar flexible workspace setups in the city. Despite the sector’s rapid growth, the year may prove to be a challenging one. “2019 is expected to be slower in terms of operator take-up. However, WeWork are expected to continue expansion with an estimated 650,000 sqft in their pipeline, and with operators from UK, Europe and the US looking at the market, we expect take-up to remain robust,” Matsumoto said. The flexible workspace sector is slated to account for 30% of Hong Kong’s property market in the next 10 years, from the current 3%.

Demand for such spaces has diversified from cash-short to startups to deep-pocketed multinational corporations in dire need of space as they continue to grow their teams and roll out innovative products. In September 2016, finance giant HSBC rented more than 300 hot desks at WeWork’s Tower 535 location to house its digital and transformation 26

HONG KONG BUSINESS | SEPTEMBER 2019

Neighborhood malls, which clinched only 8% of retail investments in 2009, have nabbed 63% of total investments into the sector by 2018.

teams, whilst Standard Chartered designed and created its own innovation lab, eXellerator, to house its new business unit SC Ventures.

“In terms of why multinationals are doing this, it’s because there’s a lot of uncertainty in the market,” Michael Glancy, director of Hong Kong Markets at JLL, said. “Having an element of flexibility within a real estate portfolio, whether its 5% or 10%, can allow firms to contract and expand easily without either taking more space, lease liabilities and capex.”

The future is in the neighbourhood Investors have also been pooling cash into a relatively underrepresented retail segment as tourists from the Mainland hold back on their spending in response to a weakening macro-environment . From late 2014 until early 2018, high street shop rents dropped more than 40% as visitor arrivals started to fall, leading retail trading conditions for high street shops and prime shopping centres to become increasingly volatile due to their reliance on visitor spending. Amidst this setting, a segment that used to be overlooked has become increasingly attractive for investors who have already injected $63b (US$8.06b) to the segment over the past decade. Neighbourhood malls, which only clinched 8% of retail investments in 2009, has secured 63% of total investments by 2018, according to a JLL report.

“As the potential capital appreciation is narrowing over time for acquiring premium and regional malls in Hong Kong, investors are seizing the opportunities to invest in neighbourhood malls whose operations are steadily supported by community demand of daily necessities.

It is believed some of the neighbourhood malls would generate higher revenue through asset enhancement works, eventually raising their investment potential,” Knight Frank’s Ji said in a statement.

Local neighbourhood malls are more reliant on spending by Hong Kong residents, which has proven to be far more stable than tourist spending. JLL believes it is no surprise that domestic spending on retail goods is far less volatile, thanks to increasing wages and falling unemployment rate. “This is one of the major reasons why investors remain keen on opportunities in neighbourhood malls as landlords can be confident that

Rental discount across Grade A office submarkets

Source: CBRE

COVER STORY RESIDENTIAL PROPERTY

Retail sales and rents

Nano-flat supply to surge 60%

Source: Knight Frank

their tenants can withstand fluctuations in the inbound tourism market. In addition, there is an expectation that luxury retailing, which typically drives prime shopping centre and high street rental growth, will not rebound over the medium term,” the research firm said in a report, noting that investors come from a mix of local, global, regional private equities and sovereign wealth funds.

The recorded higher volumes of investment is partly driven by the decision of Link REIT, the governmentbacked and largest owner of neighbourhood malls in the city, to sell parts of its portfolio. The average monthly unit rent in Link REIT’s retail portfolio has more than doubled to $65.7 psf in H1 of FY 18/19 from $30.6 psf in FY 09/10, data from JLl show. “These results significantly outperform other retail assets over the same period, including prime shopping centres (+41.8%) and high street shops (-9.9%).

In addition, neighbourhood malls typically provide a yield premium over other real estate asset classes, which is attractive to investors,” the report explained. JLL estimates that by the end of 2018, market yields for neighbourhood malls ranged between 3.0-4.5%, well above the city’s high street shops (2.5%) and Grade A offices (2.7%).

Even the product mix offered in neighbourhood malls is arguably more stable, with non-discretionary products that include supermarket goods and food and beverage, which have proven their resilience during tough economic conditions. In 2009 following the Great Financial Crisis, retail sales in supermarkets grew by 3.4% for the year, a strong performance compared with consumer discretionary categories such as clothing and footwear, which declined by 0.8% over the same period.

As neighbourhood malls mainly serve local residents, it could certainly get an uplift in retail demand from an increase in residential population amidst the significant supply of new private and public homes. JLL noted that the top areas that will see the most sprout in new residential supply between 2018 and 2022 include Cheung Sha Wan/ Sham Shui Po, Tuen Mun and Shatin.

“The population of Cheung Sha Wan/Sham Shui Po is forecasted to increase by just over 70,000 people by the end of 2022. JLL estimates that the new households that move to Cheung Sha Wan/Sham Shui Po could spend an additional $180m per month on non-discretionary items, with a large amount of that being spent in the area,” the firm explained.

Market yields for neighborhood malls ranged between 3.04.5% by the end of 2018, well above high street shops (2.5%) and Grade A offices (2.7%).

Over 3,000 nano flats are scheduled for completion between 2019 and 2021, which is 60% more than the amount built between 2016 and 2018, according to a report from JLL. These flats, which are units typically with saleable floor area of 200 sq ft or less, are expected to account for around 5% of total new private housing supply in 2019.

The supply for nano-flats is expected to outpace demand which could prompt developers to adjust asking prices in order to attract more buyers in the primary market and in turn, affect prices in the secondary market, said JLL. For instance, the T-Plus nano-flat development in Tuen Min saw around 98% of the 344 launched units sold as price cuts of up to 30% and lump sums for as low as $1.74m drove strong market take-up. “The relatively more attractive lump sums involved in the purchase of nano flats has led to buyers piling into the market. With the growth in salaries lagging home prices, developers are now having to adjust the sizes of flats built to maintain smaller lump sums that can be readily absorbed by buyers,” Henry Mok, senior director of capital markets at JLL, said in a report.

Demand for residential units ballooned by 52% in the first eight months of 2018, according to Bloomberg data, pushing the share of such dwellings in total apartment sales from 9.3% in 2017 to 12.4%.

The usual target market of nano flats are firsttime buyers, coincidentally the same audience as the government’s Starter Homes Scheme, who can only afford property costs within $6m range.

Declining home prices Because of nano-flats’ supply surge and softening prices, JLL expects this to affect the overall housing prices which could slide 0-5% in 2019. “Though the lump sums involved in purchasing nano flats are attractive, the prices of nano flats tend to underperform during market downturns since offloading units in the secondary market is only possible with steep price cuts,” said Denis Ma, head of research at JLL. An average Hong Konger earning $50,000 in annual income would need around $900,000 to purchase a home as the city ranks as the priciest housing market for the eighth year in a row, according to annual Demographia International Housing Affordability Survey, which puts the median house prices divided by annual median household income at 18.1.

Annual Housing Completions (2008-2017)

Source: JLL

HONG KONG BUSINESS | SEPTEMBER 2019

27

ANALYSIS: RESIDENTIAL PROPERTY

Keep an eye for these indicators to know the pulse on Hong Kong’s home prices Inflation, policies, mortgage rates, housing supply - which are more indicative of future price movement?

H

ong Kong’s housing price trend is a constant discussion topic. Housing prices had been on rising streak for 28 months until August 2018 when there were signs of a correction.

In 2018, a series of events have changed the housing perspective.

For example, since July, the widening interest rate gap between the Hong Kong Dollar and the US Dollar has drawn capital out of Hong Kong, causing concern about hot money exiting the housing market. In September, Hong Kong banks raised their interest rates for the first time in 12 years, prompted by US Fed’s interest rate hikes.

With concern over housing prices in mind, popular opinion tends to seek answers by looking at interest rates, the supply pipeline, new government taxes, the movement of hot money, or various combinations of these. But we think given the relative simplicity of our

economic system, there has to be a morestraightforward indicator to forecast price trends.

In the following sections, we conduct a series of simple correlation analyses to see which factor impacts housing prices the most.

Correlation 1: Housing Prices vs Liquidity in the banking system Does hot money flowing out from the city really have an impact on housing prices?

Let’s look at the historical movement of both luxury and mass residential market prices and the aggregate balance (which represents the level of interbank liquidity).

While both luxury and mass market housing prices rose consistently over the years, the interbank liquidity level fluctuated between HK$10 billion before the Global Financial Crisis to over HK$100 billion thereafter.

Although ample liquidity in Hong Kong’s banking system has kept

The Hang Seng Index is a much more straightforward indicator

28

HONG KONG BUSINESS | SEPTEMBER 2019

The effectiveness of measures introduced by the government to rein in the overheated property market remains doubtful as they failed to stop the price momentum.

interest rates low over the past 10 years, neither inflow nor outflow of money has impacted the trajectory of housing prices.

Correlation 2: Housing Prices vs Government Policies To rein in the overheated property market, the Hong Kong Government has since 2010 introduced a series of cooling measures, such as a new stamp duty and tightening of requirements for mortgage approval.

However, the effectiveness of these policies remains doubtful as they failed to stop the price momentum.

Correlation 3: Housing Prices vs Mortgage Rates Housing prices and mortgage rates are conventionally believed to move in opposite directions. But does the historical data support this?

Although housing prices have risen to a record height, mortgage rate movement have been flat. however,

ANALYSIS: RESIDENTIAL PROPERTY housing prices did plunge in 19971998 when mortgage rates were high. It is understandable that low mortgage rates reduce borrowing costs and drive demand for home ownership, in turn affect housing prices. But this correlation is far from clear cut. As it is not easy to accurately forecast mortgage rates movement it is not the straightforward gauge of housing prices that we are looking for.

Correlation 4: Housing Prices vs Housing Supply The historical data shows that housing prices and supply have a negative correlation (when one variable decreases, the other increases). For example, the average new housing supply in 2007-2016 was just 10,900 units per annum, far less than the average supply of 24,800 units in the previous decade.

Meanwhile, there were on average 18,000 additional households entering the private residential market every year. The insufficient supply has pushed up housing prices to record levels. This suggests that housing supply is one of the determinants of housing prices.

But the growth pattern of housing supply appears to be slightly more haphazard than price growth, making it not an easy indicator to assist our forecasts.

Housing prices and supply have a negative correlation. But the growth pattern of housing supply appears to be slightly more haphazard than price growth, making it not an easy indicator to assist with forecasts.

Correlation 5: Housing Prices vs Inflation Housing prices is often associated with Inflation. There is a certain correlation between the two, as housing prices contribute to inflation. However, it is not necessarily the case when we try to Private Housing Competion (number of units)

Source: Fitch Solutions

Monthly residential transactions (2009 - June 2019)

Source: JLL

forecast house prices from inflation as it is also influenced by many other economic factors such as oil prices, food prices and so on. Again, it would prove difficult as we look for a simple forecasting tool.

Correlation 6: Housing Prices vs GDP Housing prices and GDP growth move along very similar paths.

In years of poor economic performance, such as 1998 and 2008, housing prices dropped sharply. In the 10 years after the Global Financial Crisis, both GDP and housing prices were trending upwards. This correlation can be explained by the robust economic conditions such as the healthy labour market and stable growth of household income, which in turn supports home purchase affordability. GDP is, a good pointer for house price movements.

Correlation 7: Housing Prices vs The Hang Seng Index But not everyone is familiar with the interaction of variables that contribute to GDP. Luckily, the relatively simple structure of Hong Kong’s economy means that the local stock market index, the Hang Seng Index (HSI) is closely associated with the local economy, which in turn, provides us with a good indicator for housing price forecast.

Housing prices are highly correlated with the HSI, with a typical lag of around three to six months based on our correlation coefficient analysis. For example, the stock market crashes in 1997, 2008 and 2015 were all followed by a

delayed price decline in the housing market. In contrast, housing prices increased consistently following the periods when the stock market rallied. What this means is that even the most casual observer can now predict the general movement of Hong Kong’s housing price in the next three to six months by looking at the HSI movement today.

Conclusion Our analysis shows that, while factors like the interest rates and housing supply do impact house prices in Hong Kong, the GDP typified by the Hang Seng Indexis a much more straightforward indicator for pulse check Hong Kong housing prices.

After a long period of bull market up until the first quarter of this year, the local stock market has embarked on a path of steady decline. Yet, the local housing market has just started to show signs of weakness.

If our hypothesis of the time lag is indicative, then the extent of correction in the HSI signals a notable house price decline in the first quarter to first half of 2019.

Admittedly a more comprehensive multi-variable analysis and testing is needed to substantiate our view that HSI moves ahead of housing prices by three to six months, as well as forecasting the true extent of the price movements. But by observing HSI we now have improved our confidence in projecting our views on the market, even when they might be at odds with the prevailing market commentaries.

From Knight Frank’s Forecasting Hong Kong Home Prices: What Really Matters HONG KONG BUSINESS | SEPTEMBER 2019

29

ACCOUNTING SURVEY

International firms still dominate the list.

Accounting firms brace for IPO boom by hiking wages

Average annual remuneration packages in accounting stands at $817,000 and CPA students receive an annual remuneration of up to $283,000.

T

he big four accounting firms continued to dominate the field with their sheer size, with the top four spots remaining unchanged.

PricewaterhouseCoopers (PwC) retained the crown followed by Ernst & Young (EY), Deloitte Touche Tohmatsu HK (Deloitte) and KPMG. From 2017 until the end of Q1 2019, headcount at PwC rose 15% to 4,600 from around 4,000 in 2017; EY staff numbers climbed 10% to 3,300 people from 3,000; and total staff from Deloitte and KPMG edged up 8% to 2,700 from 2,500 and 4.5% to 2,300 from 2,200, respectively. BDO rounded out the top five with a steady headcount of 1,100 staff members.

Overall, the 24 accounting firms that make up the rankings have about 17,794 employees, up 8% from 16,470 employees in 2017.

Clement Chan, managing director of assurance at BDO, remarked that the larger firms would likely be open to integrate other non-accounting practices to enhance their advisory 30

HONG KONG BUSINESS | SEPTEMBER 2019

Clement Chan

Poh Weng Wong

competencies due to market needs.

“Local firms can find their market edge if they can find a less crowded area to specialise such as tax dispute advisory, expertise in some specific countries or region, transaction advisory,” Chan added.

Hong Kong is home to 5,769 establishments involved in accounting, tax consultancy, bookkeeping and auditing services with around 31,507 employees as of end2018, data from the Hong Kong Trade Development Council show.

IPO boom According to Poh Weng Wong, chairman at RSM Hong Kong, in-demand job functions include those in audit and assurance amidst heightened IPO activities; PRC tax, as clients are becoming more exposed to business and operations in Mainland China; risk advisory services, thanks to the rising demand of internal audit function and corporate governance practices requested by listed companies and sizeable NGOs; technology and management consulting, because of tech adoption; and forensic

accounting & litigation support.

“The demand for accounting professionals is increasing; thus, outlook for the sector in the next 4-5 years is positive,” Wong said.

The need for more professionals in this space will also be driven by the substantial increase in IPO projects. A PwC study says 2019 will see 200 IPOs, including 170 listings on the HKEX’s mainboard, for a total haul of up to $300b.“There are more than 80 companies listed in Hong Kong in the first half of 2019 and the trend is visibly upward sloping from the data of Hong Kong Stock Exchange. The demand for accounting professionals for the position of CFO, INED, accounting staff and internal auditors will definitely increase,” Wong said.

Talent wars In a survey by the Hong Kong Institute of Certified Public Accountants (HKICPA) conducted in 2018, 83% of its senior and middle-management member respondents from the Big Four accounting firms cited that they are finding it difficult to recruit staff and about 96% admitted that they are struggling to retain staff.Spokespersons from BDO, RSM, ShineWing and Mazars all echoed the sentiment as a survey from Robert Half notes fierce competition to recruit and retain top talent, given the growing mobility of employees seeking to move from one firm to another.

Apart from the challenge of recruiting experienced auditors, Chan laments that certified public accounting (CPA) firms are gradually losing their appeal to young graduates as much of what is associated with the industry leaves much to be desired, including long work hours, lack of work-life balance, extensive travelling and limited growth prospects.

Wong commented that long working hours are unavoidable during the peak season in the first quarter every year but work hours are expected to return to normal in the second half of the year.

Stephen Weatherseed, managing

ACCOUNTING SURVEY Average Salary Increment per year vs Number of Job Changes

Roy Lo

Source: jobsDB

director at Mazars, added that the audit profession could be seen as a “dangerous” job because of being involved with regulatory investigations and sanctions against individuals.

However, managing partner of ShineWing Hong Kong Roy Lo argued that this is not the case.

“Each set of financial figures can tell a different story. If people can draw an overall picture based on accounting figures, they will start analysing the situations that can be something interesting,” Lo said.

In response to the talent crunch, firms have enhanced salary packages to attract top talent as big firms restructure their respective finance teams to handle increasingly complex commercial and industrial (C&I) functions, according to Hays’ 2019 Asia Salary Guide.

Jobs that have seen pay hike in maximum permanent salary per annum are junior business analysts, from $300,000 in 2018 to $312,000 in 2019; management accountants, from $420,000 to $450,000 in the same period; and account clerks, from $180,000 to $204,000, a report from Robert Walters noted.

Furthermore, a HKICPA survey also stated that the sector continues to be one of the highest-paying professions in Hong Kong, revealing average annual remuneration of $817,000, whilst CPA students receive an average annual remuneration of up to $283,000.

About 87% of its respondents have also experienced a rise in pay.

Lo and Chan shared that both firms enacted policies for their employees’ career growth and

work-life balance. Chan added that they are looking for further improvements to compensation packages, working environment, and training schemes.

Meanwhile, PwC Asia Pacific and Greater China chairman Raymund Chao added that their firm has introduced its WeFlex programme designed to give employees more flexibility. “We have designed an upskilling programme to meet this need by helping our people unlock their digital potential. This will help us to be more confident and credible in providing a digitally enhanced experience for our clients, and also, ourselves,” he said.

In RSM, Wong shared that they put emphasis on their staff’s work-life balance by having a social committee that holds recreational/ social activities for their family members to join. Events can come in the form of local tours and even two-day overseas trips.

On her part, EY’s managing partner for Hong Kong & Macau Agnes Chan believes that the accouting profession continues to hold appeal for jobseekers, noting that around 400 graduates have recently joined their team. “We are a very diversified profession nowadays. People can join us in the taxation field, people can join us in the mergers and acquisitions department, and people can also join us in the advisory department, which provides support in the areas of cyber security, in the areas of artificial intelligence,” she said.

Tech adoption In addition to challenges related

Raymund Chao

Stephen Weatherseed

Agnes Chan

to talent, the digital transformation wave that has swept across most industries has not exempted the accounting industry. “We have a significant uptick in enquiries with cloud-based accounting and ERP/ CRM systems. The awareness and comfort level with cloud-based technologies have significantly improved,” Wong observed.

RSM adopted cloud-based business applications, including office 365, help desk ticket management and content management systems as well as intranet and cloud customer relationship management. The firm also has plans to apply cloud-based professional services automation system and foresees the adoption of robotic process automation (RPA) as the next big trend.

Despite fears surrounding the growing automation of manual tasks, EY’s Chan believes that robots will not render humans redundant. “We also thought ‘okay, it’s going to replace all the secretaries, we don’t need secretaries to type all of our reports because we all type on computers ourselves’. With computers, they actually improved the efficiency of our work, and at the same time we have asked EY people to do other even higher value work. So I do not believe it,” she said, citing cites how auditors used to check every invoice for verification but have since adopted its EY Helix platform to sort out invoices for them, leaving their employees to pursue higher-value tasks. “This is how you can appreciate it. Even technology is just moving people to do other types of work.”

“The issue would be whether the technology talents in Hong Kong would be able to catch up with the demand and market expectations,” Wong concluded.

EY’s Helix Platform frees employees from sorting out invoices

HONG KONG BUSINESS | SEPTEMBER 2019

31

ACCOUNTING SURVEY 2019 RANKING

ACCOUNTING FIRM

2017 RANKING

NUMBER OF EMPLOYEES IN 2017

NUMBER OF EMPLOYEES IN 2019 (AS OF Q1)

NUMBER OF ACCOUNTING PROFESSIONALS (AS OF Q1)

CEO OR COUNTRY HEAD

1

PricewaterhouseCoopers

1

4,000

4,600*

almost 4,600

RAYMUND CHAO

2

Ernst & Young (EY)

2

3,000

3,300

<3,300

AGNES CHAN

3

Deloitte Touche Tohmatsu HK

3

2,500

2,700

N/A

DENNIS CHOW

4

KPMG

4

2,200

2,300

1,950

AYESHA LAU

5

BDO

5

1,100

1,100

N/A

CLEMENT CHAN JOHNSON KONG

6

RSM Hong Kong

6

600

680

620

STEPHEN WONG EUGENE LIU

7

HLB Hodgson Impey Cheng

7

450

>450*

<430*

RAYMOND CHENG

8

ShineWing HK CPA LTD

8

350

400*

350*

ROY LO

9

Crowe (HK) CPA Limited

8

350

368

260

CHARLES CHAN

10

Mazars CPA Ltd.

10

300

300

225

STEPHEN WEATHERSEED

10

Baker Tilly Hong Kong

11

300

300

70

ANDREW ROSS

11

Grant Thornton

12

200

200**

170**

DANIEL LIN

11

Cheng & Cheng

12

200

200

N/A

ANDREW CHENG HONG KEI FRANCIS CHENG HONG CHEUNG

12

PKF Hong Kong Ltd.

14

150

125

82

DAVID LEONG

13

Aoba - Hopkins Group

15

114

114**

80**

EDMOND POON

14

Patrick Wong CPA

16

100

100**

N/A**

PATRICK WONG

14

Pan-China (H.K.) CPA LIMITED

16

100

100**

<100**

PATRICK NG

15

Wong Brothers & Co.

18

94

94**

N/A**

CHARLES CL CHOW

16

Ting Ho Kwan & Chan CPA

19

80

80**

18**

STEPHEN TING

17

HLM CPA

20

78

75

<70

ELIZA YUEN

18

FTW & Partners CPA Ltd.

21

68

68**

45**

FREDERICK TSANG

19

KLC CPA's

23

51

50

40

KENNIC L.H. LUI

19

C K Yau & Partners

24

45

50

40

JOSEPH YAU YIN KWUN

20

Lawrence Cheung CPA

25

40

40**

11**

LAWRENCE CHEUNG WAI-KOU

TOTAL

16,470

17,794

*ESTIMATED FIGURES **DATA RETAINED FROM 2017

32

HONG KONG BUSINESS | SEPTEMBER 2019

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ANALYSIS: RETAIL

Retailers race to up their digital game as rents rise and sales fall RFID chips, facial recognition and heat maps to optimise the shopping experience may soon be the norm.

H

ong Kong’s retail industry is instrumental to the city’s economy. Beyond consumer goods and services, the industry, alongside the wholesale sector, accounts for about 4% of GDP. Shopping revenues in the city are divided between local residents (70%) and visitors (30%). From the 2000s to 2013, when Hong Kong eased entry requirements for individual travellers from mainland China to help spur the economy, the industry experienced rapid growth. Last year the number of tourists expanded nearly 9% to total 65 million. This surge placed renewed demands on the industry’s manpower.

A government report on manpower this year projected that Hong Kong could face a shortfall of as many as 250,000 workers in 2027. The challenge stems from the number of tourists in Hong Kong outstripping the number of people

K11 Musea is the latest to try the experientail retail

34

HONG KONG BUSINESS | SEPTEMBER 2019

who work in the retail industry.

Between 2004 and 2018, the number of tourists in Hong Kong increased nearly 200%, compared with an increase in the retail workforce of just 28%. By any measure, retail is important to tourism, which accounts for 5 % of GDP. Main challenges Asked to identify the top three major challenges the Hong Kong retail industry faces, survey respondents singled out high rent by a considerable margin: 79 %. Private retail rents have steadily increased across the city over the last three years. On Hong Kong Island, for example, monthly rent per square metre averaged $1,499 in 2016, $1,518 in 2017, and $1,526 in 2018.

The next two challenges respondents identified are linked to employment: 53% cited talent shortage, and 48% named the high

Monthly rent per square metre on Hong Kong Island averaged $1,499 in 2016, $1,518 in 2017 and $1,526 in 2018.

turnover rate of retail staff. An inability to source talent inhibits the industry’s expansion plans. One leading Hong Kong retailer has a vacancy rate of between 8 and 9% across its 200 stores in the city. For another that operates nearly 30 stores locally, the shortages reach doubledigit percentages.

Competition from online purchase platforms ranked fourth in the survey question about major challenges the industry faces. The disruption caused by mobile-first customers is changing the industry.

Empowered by instant access to information about goods wherever they are, customers are becoming more exacting. Hong Kong retailers therefore need a technologically savvy workforce.

Talent challenges in focus The survey findings reveal the retail industry’s talent issues arise from economic and social factors,

ANALYSIS: RETAIL combined with reasons tied to the nature of the work.

At the top of the list is the view that staff must work hours which run counter to shifting expectations on work-life balance, often on their feet, during public holidays and weekends. That perception was cited by 80%. Unattractive wages came second, identified by 68%.

In third place is Hong Kong’s low unemployment rate, as indicated by 62% of responses. Over the last three years, the city’s unemployment rate has steadily declined: 3.4% in 2016, 3.1% in 2017 and 2.8% in 2018. This trend suggests jobseekers can be increasingly choosy when looking for work.

The focus group participants stated these concerns would need to be addressed to make the industry more attractive to them and their peers. Students in the focus groups who expressed reluctance to enter the industry used words like “exhausting” and “pitiful” to describe their perception of working in retail.

Amid the overall reduced interest in working in retail, Hong Kong’s manpower supply is projected to decrease at an average annual rate of 0.2% between 2017 and 2027, according to the government’s manpower report. Combined with a rapidly ageing workforce – about 24.4% of the city’s manpower supply in 2027 will be aged 55 or above – the talent shortage is on course to become even more acute.

Respondents were asked to identify the top three anticipated effects of the Hong Kong retail industry’s undersupply of talent in the next two years. Lower customer service quality, slower or negative Biggest source of retailer woes

Source: KPMG

Service quality gaps could be bridged by effective recruitment.

The areas hardest to recruit are front-line customer service staff and retail salespersons.

Hong Kong retail sales history from 2013-2019 (in billions)

Source: PwC

sales growth, and lower staff morale and productivity lead the list.

Coming in fourth is deferred or postponed business expansion plans.

Alan Chau, Head of Operations at Tse Sui Luen Jewellery (HK) Co Ltd – also known as TSL – says that if staff were readily available, the company would be more eager to expand in Hong Kong. This factor ties into the fifth-ranked effect, namely that businesses would become less competitive regionally and globally. Tse of the HKRMA adds that these anticipated effects could possibly hold retailers back in pursuing their technological ambitions, which is contradictory to where the retail industry should head. “The new era of retail enabled by the latest technologies is essential not only to customer experience but also to Millennials setting their sights on careers in the industry,” she explains.

Hardest areas to recruit Service quality gaps could be bridged by effective recruitment.

The areas where companies find it hardest to recruit are front-line customer service staff and retail salespersons (each selected by 72% of respondents), followed by technicians supporting retail technologies/digitalisation/ecommerce (64%) and supervisors or managerial grade staff (63%).

When it comes to considering overseas workers to fill the talent gap, language skills are the most soughtafter quality in front-line customer service staff and retail salespersons jobs, the survey indicated.

However, Randy Lai, CEO of

McDonald’s Hong Kong, says there is a more pressing issue. “Currently the biggest challenge is to sustain a stable and efficient workforce that has adequate product knowledge to serve customers,” she says. “Once this is achieved, the next step is to change the industry practitioners’ perception about what good customer service should entail.

Strategies for retail rebranding In terms of strategies to consider in the next two years, more staff training topped the survey at 64%.

This was followed by improved staff incentives, at 57%. The third-ranked strategy was adopting technologyenabled service/automation technologies, at 53%, closely trailed by highlighting the career possibilities associated with your brand, at 52%.

The focus groups echoed these findings, calling for better enticements to recruit and retain talent. Vocational Training Council students, for example, said companies should make working in the industry more appealing through a combination of higher salaries, better training and more flexible and controllable working hours.

The government could help significantly by allocating more funding towards rebranding to convey what it means to work in retail, according to Tse of the HKRMA. In 2014, the Commerce and Economic Development Bureau allocated $130m to assist the industry, with some $50m to support technology adoption and $70m for retail apprenticeships. Only a small amount was allocated to promoting HONG KONG BUSINESS | SEPTEMBER 2019

35

ANALYSIS: RETAIL the image of retail, she notes.

Tse says besides helping retailers to boldly transform, more money should be spent on building up the public image of the industry – not just to lure more shoppers to the city, but to stress its pivotal role in the economy. This would raise its profile in the minds of prospective staff.

In the meantime, how might individual retailers recast their image? Organisations rebrand best by telling their story. With so many channels for doing this, it is important to find creative ways to deliver success stories to the public. This is more difficult for companies whose jobs or work focus is not outwardly appealing. Yet all organisations need to ask themselves how to keep up with change.

Besides helping retailers to boldly transform, more money should be spent on building up the public image of the industry.

Talent development strategies One possible strategy to boost recruitment and retention is to make career paths more transparent. In the past, many retail companies, especially those selling fast moving consumer goods, were too accepting of high turnover rates, says Chau of TSL. He urges companies to focus on making themselves more professional by offering extensive training and a clearer career trajectory.

Malina Ngai, Group COO at A.S. Watson Group and also an HKRMA ViceChairman, notes the retail industry offers many positions across various job functions that involve more than sales. Whether it is marketing, human resources management, data analytics or finance and accounting, there is an abundance of development opportunities, she adds. “With the Number of Mainland visitors are dropping

Source: PwC

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HONG KONG BUSINESS | SEPTEMBER 2019

New shopping mall supply (2008-2019)

Source: Savills

adoption of retail technology, jobs can be interesting and provide a promising career path for young people.”

Across the focus groups, a number of participants who had worked in retail described the experience as fun, wide-ranging and suitable for those who enjoy engaging with people. Some noted that the salary was attractive when compared to clerical work requiring a similar level of experience.

In general, Hong Kong could benefit by looking at what the city needs to compete over the long run. Guy Look, CFO and Executive Director of Sa Sa International Holdings Ltd, says “we need to bring in people from outside Hong Kong to build up the industry” because of scarce expertise amid the talent shortage .

Technology initiatives A common suggestion across all the focus groups was for companies to look at ways to improve e-commerce channels in order to make their online shops and marketing as professional as in their physical stores. A focus group participant from Baptist University said too many corporate websites put up barriers to customers’ journeys, such as intrusive pop-up windows or excessive emails offering irrelevant products.

Digital transformation will make a range of workforce processes more efficient. In stores, automation in inventory management, payments and monitoring consumer habits could free up staff to spend more time on value-added tasks, such as

introducing and explaining products to customers.

Many companies are using mobile devices like tablets or smartphones for training and to provide information about a brand’s products and services. Virtual reality training is also becoming popular, allowing companies to role-play in-store scenarios with staff.

Indeed, there is some creative work that technology cannot fully replace, areas where innovation, passion and high levels of thought are required.

In jewellery, for example, some tasks can clearly be automated, but highend retailers in that field still need to invest in staff who can help create a superior customer experience.

Technologies are giving retailers data they can use to bolster competitiveness. Customer relationship management tools can help retailers keep track of what consumers buy. RFID chips allow them to know which goods are being handled in shops. WiFi usage or facial recognition can alert staff when a VIP customer enters a store. Heat maps can help improve store layouts.

The long-term solution calls for multiple responses, ranging from increasing the size of the workforce by bringing in overseas workers, to looking at how omnichannel operations may lead to a large part of a company’s business being done outside physical stores and providing consistent experiences for employees and customers. Forwardlooking organisations are asking the questions: what is the ideal shape of our workforce and what are the optimal sources of labour? From KPMG Minding the Retail Gap

HONG KONG BUSINESS | SEPTEMBER 2019

37

HUMAN RESOURCE BRIEFING

How bosses are rethinking worker wellness Tobacco giant Philip Morris International offers a tailored employee wellness plan. Colliers International has refitted its space to house better acoustics, filtered water and lighting systems and dedicated work spaces.

W

ith a survey from UBS revealing that more than six in 10 employees in Hong Kong are unhappy at work and half are intending to switch jobs, it is no surprise that employers are rethinking working conditions and perks to retain staff. And with employees in Hong Kong working an additional 24 hours during the week thanks to a prevalent issue of presenteeism, as found in a study by Maxis Global Benefits Network, many of the country’s businesses are designing office spaces and employee benefits with worker wellness in mind.

Human resources consulting firm Robert Half Hong Kong introduced its own wellness programme under the platform “It’s Time We All Work Happy” in 2018, which comprises five key initiatives touching on health and physical wellbeing, flexible work arrangements, and social responsibility. “This includes the provision of a weekly

Chris Sung

Judy Xu

Firms in the technology, banking and professional services have been the most progressive when it comes to introducing corporate wellness programmes. personal trainer for group staff workouts, discounted health club memberships, the option to leave work at 4 p.m. on Fridays, a monthly allotment of time to enjoy lunch with your family, free health checks and quarterly charitable initiatives,” Elaine Lam, associate director for Robert Half Hong Kong told Hong Kong Business.

Meanwhile, tobacco giant Philip Morris International (PMI) has tailored a wellness plan that features flexible working hours, non-fixed lunch hours wherein employees are able to take a lunch break anytime between 12 to 2 p.m., mobile devices and laptops to work from home, share job arrangements and half-day work arrangements, according to Chris Sung, senior consultant at Michael Page Hong Kong. At PMI, the HR department conducts focus groups to discuss wellness trends and creative ideas, allowing employees to vote for different wellness options.

Besides incorporating a wellness room and posting curated artwork, property consulting firm Colliers International has gone as far renovating its Hong Kong office to change up its acoustics, filtered water and lighting systems. “There’s a lot of things you can do within a workplace with lighting design to ensure that the right luminance levels are reached, to allow people to be alert and awake,” Victoria Gilbert, associate director for wellness consulting at Colliers International, explained.

Blue light, for instance, keeps people alert whilst yellowhued lights can signal the body to sleep.

Employees moved into the revamped space in September 2018, which also features adjustable tables, 38

HONG KONG BUSINESS | SEPTEMBER 2019

Elaine Lam

centralised bins and designated work spaces for meetings, collaboration projects and even report writing.

“It’s very much designed to encourage movement.

People traditionally were used to walking into the office, and sitting at their desks —maybe they get up to go to the bathroom and get a glass of water—but they aren’t used to getting up and moving around too much. So we’ve encouraged people as much as possible to move throughout the day to improve their overall wellness,” she explained.

Sung added that due to the competitive landscape of Hong Kong, more organisations have been investing into their HR function, partnering closely with HR consultancy firms, such as Mercer and Willis Towers Watson, to improve their compensation and benefits policies in an effort to improve their employer branding and remain competitive as a potential employer.

Best places to work Firms in the technology, banking and professional services have been the most progressive when it comes to introducing corporate wellness programmes, observed Judy Xu, founder and CEO of health and wellness firm Balance Group, adding that apart from activities such as yoga and meditation, companies are also deploying coaching programmes, ranging from holistic health, group coaching and executive coaching to manage corporate wellness. Balance Potential, which has worked with firms in the finance industry such as ANZ and Barclays, provides on-site health services such as consultations, treatments, assessments, and coaching to their clients which can run between three months to one year.

“Corporate wellness needs a more consistent effort. It’s not something that you do once a year through an event, say in October where we have wellness week or wellness month,” Xu stressed. “Wellness is a mindset that you need to cultivate, almost like a culture.”

Colliers’ revamped workspace

HUMAN RESOURCE BRIEFING The Balance Group CEO noted that cultivating such a culture could cost a firm anywhere between $100,000 for a yearlong coaching programme and up to $1m for the full corporate wellness package designed to boost employee health, morale and productivity, which is especially fitting in Hong Kong’s fast-moving work culture.

Fitness first Natellie Sun, managing director for Randstad Hong Kong, highlighted that Generation Z workers are amongst the most drawn to employers that have a pleasant work environment, which means a nicely-decorated and modern office that is conveniently located near good transportation and leisure areas. Beyond monetary compensation, the priorities of employees in selecting their workplace are increasingly shifting to non-financial benefits. Although salary and compensation is still the deal-breaker for most employees at 59%, according to an annual report from Randstad, achieving work-life balance

Seats with adjustable heights at Collier’s new space

Employees at Randstad Hong Kong can receive retail therapy discounts from retailers like Apple and restaurants located at Lee Gardens. has become just as important a priority at a close 58%.

Randstad Hong Kong tries to cultivate this environment for its staff through offerings like corporate rates to Pure Fitness gym, which is conveniently located close to the office and retail therapy discounts from retailers such as Apple and restaurants at the Lee Gardens area.

Citing a conversation with a senior-level client, Gilbert highlighted the importance of providing an array of wellness programmes to meet the diverse needs of a firm’s workforce, as employees and employers may not see eyeto-eye on what sort of “wellness” works for them.

“He said to me, ‘loads of employees on my team—which would be millennials—all want yoga rooms, and they want this and they want that’ and he’s like, I think it’s irrelevant.

I don’t understand why the company has to provide it,” she explained.

Pantry at Colliers

Natallie Sun

Victoria Gillbert

When asked what sort of benefits he wanted, he simply replied with good coffee. “In that case, that fits into the same thing. That’s about his wellness whereas others wanted to do more physical exercise or to have a blender so that they could focus on their nutrition in a different way,” she said.

“Once we talked about it from that perspective, it was kind of like ‘oh, okay, so you could look at it from a number of ways. For wellness, although the human body functions are the same for everybody, the initiatives that you need to have in place need to be varied so that they hit different demographics. Because not everybody’s going to want to join in a martial arts class.”

Who’s lagging behind?

Compared to the more progressive companies in the financial services sector, Sung suggested that property developers, construction companies, hospitality (particularly those in the F&B segment) industries, as well as the more local and mainland China-based companies are still lagging in doling out corporate wellness packages. “The main reason we find is because these organisations are more performance driven, and value the deliverables and outputs over other intangible elements,” Sung explained.

That said, he noted that many of these traditional businesses are highly relationship driven, and once employees are able to gain trust from management teams and senior leadership, there can be more room for flexible arrangements even if these are not based on any formal company policies.

Although there is no standard practise or initiative in terms of wellness programmes amongst Hong Kong firms, Lam expects a gradual shift in that direction as more businesses focus more efforts on corporate wellness.

“Millennials are now becoming managers. They’re becoming that middle layer that is always the most sticky in a company, because they need to influence up and they need to influence out, and it can be a big blocker. Now that they’re getting to that level, I think there’s even more reason that firms have to start looking at wellness as a whole for the business, instead of separately,” Gilbert concluded.

HONG KONG BUSINESS | SEPTEMBER 2019

39

LEGAL BRIEFING

It’s no fun to dummy bid the YWCA In a landmark judgment, the tribunal ruled against bid rigging and price-fixing schemes and found a number of IT solutions providers and ten residential renovation contractors guilty of anti-competitive practices.

I

n the first ruling under Hong Kong’s competition law, the tribunal found that IT solutions provider BT Hong Kong rigged a bid to supply and install a hyper-converged IT server system for the Young Women’s Christian Association (YWCA). The YWCA required five bids for the system, so BT arranged for four other companies to submit dummy bids to comply with bid terms. The Hong Kong Competition Commission (HKCC) filed a complaint against five IT firms, Nutanix, BT Hong Kong, SiS International, Innovix and Tech-2, alleging that only BT was interested in bidding and that Nutanix conspired with BT to obtain dummy bids from other Nutanix channel partners. The Tribunal ruled that Nutanix, BT, Innovix and Tech-21 engaged in bid-rigging although HKCC was unsuccessful in its case against SiS after concluding that the employee’s rogue actions had no authority to bind the whole company.

Fresh from success in the YWCA case, the HKCC won its case against 10 residential renovation contractors which participated in a scheme where they would only work on the renovation of designated floors in each of the three buildings in On Tat Estate, Kwun Tong and even agreed on

Undertakings that violate competition rules may be ordered to pecuniary penalty of up to 10% of its annual turnover in Hong Kong

Christopher Short

The most complained against sectors are the construction and IT sectors

Stephanie Lau

Adelaide Luke

the package prices for certain renovation items.

Hong Kong Business reached out to prominent legal players for their take on the landmark ruling and what it means for the legal industry moving forward.

Q. How does the new bill define competition? What practices can be interpreted as anti-competitive?

Counsel Christopher Short and senior associate Stephanie Lau at Clyde & Co. noted that the definition of competition under the competition ordinance is not straightforward, and is linked to contravention (or alleged contravention) of a “competition rule” or a “decision relating to a competition rule.” In essence there are three rules, the first conduct rule seeks to prohibit arrangements between market participants such as price collusion, market sharing, bid-rigging activities. The second conduct rule targets undertakings who have a substantial degree of market power in abusing that power with a view to protecting or increasing their position of power and profits whilst the merger rule is limited to mergers relating to undertakings directly or indirectly holding licences issued under the Telecommunications Ordinance.

The Commission so far has received complaints dealing with both the first and second conduct rules, said Adelaide Luke, a partner at Herbert Smith Freehills. She added that cartel conduct such as bid-rigging, which falls 40

HONG KONG BUSINESS | SEPTEMBER 2019

Ben Bury

Giovanna Kwong

Alastair Long

under the First Conduct Rule, is a common issue in many sectors whilst second conduct cases have yet to be raised to the Tribunal. However, Ben Bury, partner at Holman Fenwick Willan, explained that the first two decisions handed down by the Competition Tribunal concern an infringement of the first conduct rule which is concerned with preventing cartel conduct, or “making or giving effect to an agreement, engaging a concerted practice, or making or giving effect to a decision of an association, if the object or effect is to harm competition in Hong Kong.”

Q. What are the implications for undertakings that violated the competition rules?

Giovanna Kwong, a partner at Stephenson Harwood, mentioned that the Competition Tribunal is empowered to make various orders against an undertaking. For example, an order for a declaration that the undertaking has contravened a competition rule, an order restraining it from engaging in any conduct that constitutes the contravention. Financially, undertakings may be ordered to pecuniary penalty of up to 10% of its annual turnover in Hong Kong. Directors of the undertaking may also be found liable for the anti-competitive conduct, including a director disqualification order.

Q. The Ordinance proved its merit in curbing anticompetitive practices in the telco and building sector.

What other industries would benefit from it?

The Commission has once said that the most complainedagainst sectors are the construction and information technology sectors, Kwong noted.

Furthermore, senior associate at Clyde & Co., Alastair Long, explained that the transportation industry and supply chain industries are susceptible to the impact of the competition ordinance, particularly where business consider that the consolidation of their resources/ capabilities is necessary to survive more challenging economic headwinds. The financial services industry is also an area where the effects of the competition ordinance will require to be considered with care.

MARKETING BRIEFING

How should Instagram budgets be spent?

With over two million Instagram users in Hong Kong, Hong Kong Business turned to the experts to ask which firms are doing it right and what are the best ways to replicate their success.

S

hopping mall K11 Hong Kong (@k11hk) is leading the country’s Instagram marketing scene with close to 100,000 followers, setting an example for other firms seeking to replicate the firm’s social media success.

By mastering the art of posting bold and colourful overlapping content, which come to create a cohesive nine-post grid, the mall is able to showcase its offerings and the latest exhibitions in more interactive manner.

“They’re not purely reposting photos. They’ve made good use of graphics and art elements—it is adding new value by using an artisanal way in presentation. Social media users are easily bored and the new value created provides a new perspective that allows users to understand the message in the content,” Sonic Kwok, founder and director for digital agency Rabbit Studio, explained to Hong Kong Business.

Lifestyle brand Compare Retreats (@compareretreats), which provides tips and information to users looking for a retreat destination along with scenic ocean view images, has witnessed significant growth in followers over the last 18 months, said Isabella Francisca, marketing strategist for Taksu Digital. According to social media statistics and analytics tracker Social Blade, the firm recorded a near 5,000 follower spike in one day in September 2017. Whilst Francisca noted that the surge occurred in tandem with a giveaway competition the firm ran during the period, Compare Retreats was still able to sustain this growth and amassed over 30,000 active followers to date.

A 2012 report from Experian Marketing Services found that many businesses still fail to understand the nuances of content management, suggested Henry Wood, managing director for Totem Media Hong Kong. “A weird finding we’ve got is that images of food don’t really work for hotels, even though images of food make up around 60% of their content as they try to promote their restaurants and bars.

It’s a strange dichotomy where they are promoting food but those images are performing poorly for them,” he explained, citing the firm’s research.

k11’s Instagram feed

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HONG KONG BUSINESS | SEPTEMBER 2019

Sonic Kwok

Isabella Francisca

Henry Wood

Users also tend to not respond well to posts featuring a person in a room, according to Totem Media research.

“There’s even a difference between whether that person is facing the camera or not. So little changes like this can make quite a difference in terms of a firm’s goal in balancing the promotion of their services and offerings, and the effectiveness of what they are doing,” he said.

Wood also noted that simple product images do well by itself, referring to research Totem Media conducted for a beauty company. “Just taking a photo of the actual product did much better than any lifestyle engagement post or anything that was sort of irrelevant. What the company was missing out on though, were comments underneath their posts asking how much the item costs, and whether it was available in other countries.”

Images of food don’t really work for hotels even though they make up around 60% of their content. It’s a strange dichotomy where they are promoting food but those images are performing poorly for them .

“This all feeds into a firm’s broader marketing strategy and where Instagram sits within that environment. You may not want to use Instagram to drive direct sales and instead use it for brand positioning, but regardless, if you are going to use the platform, then consider it as a customer touchpoint,” he said.

According to Anthony DeGennaro, director of marketing at Dragon Social, businesses in Hong Kong spend between 5-15% of their total annual revenue on marketing, of which 30-50% goes into social media and digital advertising. “Small businesses usually spend under $10,000 on a monthly basis,” he observed, but adds that it is possible to get a good return on investment (ROI) out of a smaller Instagram budget, which Francisca noted could even start for as low as $5,000. “Brands could also reach out to micro or nano influences to promote their products, which allows the promotions to seem more authentic as these users with smaller following seem more ‘real’ to other users,” DeGennaro added. “The cost is also dramatically lower, so brands can afford to work with a huge number of these smaller influencers rather than spending all of their budget on one larger influencer, like a celebrity.”

Albin Lix, founder and general manager of Digital Business Lab, identifies the influencer marketing operations of Estee Lauder (@esteelauder_hk) and Benefit Cosmetics’ (@benefitcosmeticshk) as very successful, explaining that the use of different influencers from teenagers to working moms enabled the firms to efficiently capture a range of audiences to convey that their products are suitable for virtually everyone.

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OPINION

JANET YEUNG

Why advanced technologies are the Holy Grail for Hong Kong employers

H

ong Kong’s seasonally adjusted unemployment rate currently stands at 2.8% the same as it has done for fourteen quarters.

This, together with a shrinking talent pool and skills shortage, has meant that the HR sector as a whole has become adept at initiating creative strategies to identify, recruit, nurture and retain talent. All this whilst fending off other companies eager to hire staff away in a market driven by the job-seeker.

Today, the Hong Kong jobs market is awash with vacancies.

A low unemployment rate and a surplus of vacancies means the market is driven by job-seekers who change jobs frequently in the hunt for new experiences, greater work-life balance or for better compensation package.

In a bid to overcome this imbalance, some employers see technology as a means to solve their recruitment woes by automating processes to negate the need for taking on more staff. This viewpoint comes at a time when the world stands on the cusp of Globalisation 4.0, where technology, politics and environmental concerns will shift workplace models.

These workplace models will require companies to embrace automation, machine learning, artificial intelligence and other advanced technologies, and there is a line of thinking that employees in some roles will become redundant.

This viewpoint that the introduction of advanced technologies in the workplace will increase unemployment and lead to staff retrenchment is misguided.

If anything, Hong Kong employers, as they have many demonstrated many times before, stand to carve out and create brand new opportunities to aid business growth through the mix of advanced technologies and ongoing creative HR strategies.

Co-existence in Hong Kong’s commercial property sector An example of how Hong Kong has forced change, would be the emergence of shared or co-shared offices in the commercial property sector; a business model once dominated by serviced offices but even then there was limited supply.

In the last five years, Hong Kong, often cited as having the highest office rental rates in the world, has seen a tremendous wave of affordable and flexible office space come on stream. This has disrupted the old way of working and was driven largely by the startup community before being embraced by SMEs, large enterprises and property developers alike.

The emergence of this new way of working has done little to dampen demand for new office developments; for proof, just take a walk through the business districts of Kwun Tong and Quarry Bay, to see the commercial property sector’s ongoing impact with new office buildings sprouting up everywhere.

This shows that there is room for old and new ways of working – in this case, the commercial property sector – to co-exist.

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HONG KONG BUSINESS | SEPTEMBER 2019

JANET YEUNG Head of Human Resources & Administration, JOS Hong Kong

Businesses will reskill their workforce to prepare for the future.

Robots and humans Elsewhere, some industries are exploring new technologies as a solution to existing challenges. Hotels in China, Singapore and other countries are trialling the usage of robots to provide on-demand guest services. These robots are intended to assist rather than to replace staff and demonstrate how new technologies can work alongside humans rather than replace them.

Significant investment by Hong Kong The HKSAR Government has to date invested $100b on encouraging R&D, promoting re-industrialisation, promoting technology to bolster Hong Kong’s competitiveness, and also to create more opportunities for local enterprises and rising talent.

Added to this is a fast-track arrangement designed to allow technology professionals to come to Hong Kong and work alongside locally nurtured talent.

With the great strides being made to upskill and reskill employees, Hong Kong businesses have an even greater incentive to harness and integrate these very same skills into their workforces. Rather than look to technology as a means to shrink staff numbers, advanced technologies are the Holy Grail for recruitment and retention strategies in growing workforces.

2019 should be the year when businesses look to reskilling and upskilling their workforce in preparation for an influx of new technologies into the workplace. Machine learning, artificial intelligence, behavioural analytics are here and making their presence felt by helping enterprises uplift into Globalisation 4.0.

Hong Kong employers have demonstrated great resilience in a job market that is notoriously hard to operate and where HR professionals are continuously creating, identifying and pivoting to new recruitment strategies. Advanced technologies will go hand in hand with an employer keen to upskill the current workforce to adapt to a changing business world. Those that invest in both stand to gain more business opportunities and reap greater returns as they digitally transform ahead of Globalisation 4.0.

OPINION

TIM HAMLETT

What happened to New Look Lam? TIM HAMLETT Former Editor of Sunday Standard and Associate Professor of Journalism

T

hey seek her here, they seek her there, they seek her everywhere, but where is the new-look, caring, sharing, new leaf turned over Carrie Lam? The apology was nice. The promise to listen more was encouraging, and what have we seen since? Not much. The lady has disappeared into the Fuhrer bunker, meeting only groups of her presumably disgruntled supporters, police unions, and other implausible sources of information on what the people are singing.

I realise there is a matter of face involved here. The government does not wish to admit defeat. But we have to be realistic about these things. The extradition bill was a resounding mistake and resounding mistakes have consequences.

It is no good saying that you now want to put this divisive stuff behind us and get on with economic and livelihood issues. This put you in the position of the guest who kicks the dog, insults your wife and stubs a cigarette out on your sideboard, and then as you prepare to throw him out asks “what’s for dinner?”

The government has been lucky. Unlike the Umbrella movement, the protestors have generally only asked for things which are in the government’s gift. The problem with the CE election method was in Beijing. Current discontents concern matters which are clearly for our government to decide if it wishes to do so. Under the circumstances it is a good idea, having identified a feasible concession, to make it in a generous way which allows everyone concerned to tick it off their lists. Instead we get concessions which annoy the government’s poodles without satisfying its critics.

Full recall Let us take the bill itself. The official line is now that this has been suspended. It will not be unsuspended and the government accepts that it will die when the Legco session ends next year.Protestors, meanwhile, want the bill withdrawn. Unnecessary, say the officials.

If the bill is unofficially dead why not have it officially dead rather than have the corpse lying around stinking the place up?

Then there is the matter of whether June 12 should be described as a riot. This is another issue where words are more of a problem than substance. Fom a legal point of view it does not matter whether the Chief Executive or the Police Commissioner describe the event as a riot. In the old days, back in the UK, this was different. When a public disorder took place a Justice of the Peace would turn up.

In those days being a JP was a real – though part-time – job, not a cheap ornament bestowed on the government’s supporters.

After an hour had passed the disorder then legally became a riot, and anyone still present could be charged and convicted whatever he or she was actually doing. The maximum penalty was three years in jail, or two with hard labour.

But this was not the system in the colonies. Hong Kong’s law in the matter is much simpler. Any assembly without police approval is an unlawful assembly. If violence occurs it is a riot and all those 46

HONG KONG BUSINESS | SEPTEMBER 2019

The Umbrella Movement immortalised across the city.

present are rioters whether they are personally violent or not. And the maximum penalty is ten years.

This is a bad law and the general reluctance to use it over the years is quite understandable. The suggestion that only those who have been violent will be prosecuted for rioting suggests a way out of the impasse. This would be to say that nobody would be charged with rioting; those who have been violent will be charged with the appropriate variation on assault and those who have not been violent will not be charged at all.

Then there is the matter of the inquiry into police conduct on June. First this elicited a flat no. Existing system perfectly satisfactory. Then the Independent Police Complaints people said they would set up a little task force to look at assaults and other misunderstandings involving the media.

It emerged that the police complaints people were going to do a look at the whole thing. Carrie, while maintaining that this was entirely the complaints people’s idea, promptly endorsed it and set a deadline. So we have another half-hearted concession which will satisfy nobody. The resulting inquiry will not have the powers of a proper commission, it will be undertaken by people who do not command instant trust, and it will be done in a tearing hurry.

During the protests in Hong Kong over the Tienanmen Massacre huge numbers of people turned out. If anyone carried an umbrella it was to keep the sun off. Protests against proposed national security legislation in 2003 were also huge and peaceful.

It is going to be very difficult to undo this long-term escalation in levels of violence. As Clausewitz put it, it is difficult to reinstate limits which depended largely on people not realising what was possible. Our leaders could usefully try to be more soothing, instead of seeking every opportunity to make partisan points.

Those who wish to work can work. Those who wish to blame the government’s critics for unrepaired hospitals, unraised wages or unfinanced projects need to remember what we are supposed to be doing: heel rifts, resolve conflicts, all that stuff. Or has that line been abandoned already?

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RACE TO REFORM

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OPINION

HEMLOCK

It’s not dysfunctional but deliberate

A

ll of a sudden, it seems Hong Kong needs a ‘fresh start’. Officials who, a few weeks ago, were trying to destroy the barriers protecting the city from Chinese Communist Party-style justice have miraculously transformed into contrite and reflective semi-innocents. They present themselves as victims of misunderstanding, if not actual mishap, and they beg not just for forgiveness but for the right to carry on (maybe a bit differently).

Establishment and other constructive and polite moderates concede that there might be something systemically wrong. Officials and even pro-Beijing types who were gloriously ‘out of touch’ in the 1990s seemingly come back to life as one to support postExtradition Screw-Up reconciliation. Business-sector politician Felix Chung boldly suggests a revamp of the Executive Council. He is joined by mildly inoffensive commentators, who go full hand-wringing about how the Executive Council failed to read the public mood.

ExCo looks like a handy scapegoat. It is officially an ‘advisory’ body, but many of its non-executive members are simply given seats as a symbolic reward for their parties’ loyalty. There is little evidence that they have input into policy; all the signs are that they are used to disseminate the official line.

ExCo is not aimed at ‘reading the public mood’. No part of Hong Kong’s political structure is intended to represent popular opinion to those in power. Since 2014, the trend has been in other direction, with the legislature weakened, political rights tightened, and activists penalized. Elections, consultations and advisory bodies are ceremonial or rigged.

The reason is brutal and simple: this is part of China’s overall political structure, in which all power comes from the central point at the top, downwards.

All this Anson Chan et al stuff about how we must now ‘re-think this system’, it doesn’t work, it is dysfunctional, the leaders are out of touch, Hong Kong needs to revisit democratic reform – this is naïve baloney. This top-down authoritarian style of rule is not a mistake or a design fault or a ‘problem’. It is deliberate. To the CCP, the system’s whole purpose is to sideline and override the popular will. The fact that it has provoked a backlash on extradition just tells them it’s still not rigorous enough.

But one can’t deny that rising inequality and visibly declining quality of life add to the discontent. So, just as the massive anti-extradition protests have prompted agonizing over the unrepresentative political structure, we currently have an outbreak in pro-establishment circles of Let’s Finally Get Serious About Stuff like social harmony and housing.

And, just as with the structure, we need to face the possibility that the municipal misgovernance is not an 48

HONG KONG BUSINESS | SEPTEMBER 2019

BY HEMLOCK www.biglychee.com Email: hemlock@hellokitty.com

Protesters at Harcourt Road

unfortunate accident – but deliberate.

This is a challenge. It’s easy to understand that Leninist Beijing’s system of government for Hong Kong is undemocratic by design. But it’s harder to see so much apparently random assorted crap going wrong as part of a plan, especially if you are not into conspiracy theories.

Every Hong Kong administration since 1997 has had one broad implied policy theme. You can call it ‘to push up housing prices’, ‘to push up rents’, ‘to maximize developers’ margins’, ‘to boost land valuations’ or ‘to accumulate large government surpluses/reserves’. It’s hard to tell which of these is the aim and which are side-effects – but it’s real.

As well as obvious manipulation of (and lies about) land supply, we have had around 1 million new immigrants from the Mainland to house, while officials have actively facilitated production of luxury housing for sale to outsiders. At the same time, huge numbers of Mainland tourist-shoppers have swamped public space and seriously distorted the retail sector. All these increase the cost of living and reduce economic opportunities.

Meanwhile, officials under-spend on hospitals and welfare, ignore environmental problems, and maintain a public-school system for the masses that has a hopelessly outdated curriculum. Officials who fret about an aging population (hence the need for immigrants), also tell young people to leave Hong Kong to enjoy Bay Area Opportunities.

Is it paranoid to suspect that the running-down of Hong Kong’s material quality of life is more than just incompetence – but a strategy? For the answer, watch how determinedly Beijing pushes Carrie Lam to finally fix housing. (Or look at Xinjiang or Tibet, or ask how many speakers of Manchu you run across these days.)

“One can’t deny that rising inequality and visibly declining quality of life add to the discontent.”