27 October 2014

Improved market sentiment is giving a good boosting to the overall  property market in Hong Kong, according to Colliers International Hong Kong Property Research and Forecast Report 3Q 2014. While demand from end-users is gathering a strong momentum, lack of supply in the market remains a challenge for occupiers. Fundamental imbalance between demand and supply leads to limited leasing options. As a result, there is a growing enthusiasm amongst users to purchase for own use rather which is reflected in the growing transaction volume in sales market in spite of the government’s demand curb measures.

The following highlights the report’s findings and projections for different property markets in Hong Kong:

Office Market
Despite lackluster demand from global occupiers against a general backdrop of cost-cutting, overall Grade A net absorption increased by 352,000 sq ft QoQ during 3Q 2014. All major sub-markets recorded positive net take-up. In Central, demand was mainly underpinned by new leasing enquiries from mainland financial firms while Kowloon East continued to benefit from increased demand as tenants look for cost saving alternatives.

In 3Q2014, overall Grade A office rents stabilised at HK$64.4 per sq ft as most tenants are expected to remain in situ upon lease expiry. Most sub-markets on Hong Kong Island may see a 4-5% growth. However, landlords in Kowloon East continued to face intense competition for tenants as lower grade offices and industrial revitalisation buildings have become alternatives for cost-conscious tenants. Looking forward, Grade A office rentals will remain flat, seeing a nominal growth of 0.6% in 2014 and a further 2.7% in 2015. 

Driven by the lack of large, contiguous space available for lease and the increasing fit-out and relocation costs, large occupiers seeking to consolidate their operations under one roof and looking at alternative corporate real estate strategies, there is a growing enthusiasm amongst owner occupiers to purchase rather than lease and relocate every few years. 

Residential Market
In the last quarter, developers continued launching new projects and offered attractive pricing and other incentives, such as subsidies to cover the extra stamp duty, number of sales rebounded strongly. According to the Land Registry, transaction volume edged up 51% QoQ during the three-month period ending August 2014. In particular, July’s 7,792 recorded residential sales represented the largest gain in a single month since November 2012.

“Underestimated demand, coupled with a lack of supply in the current market and a particular lack of small-to-medium sized flats in urban areas, explain home prices which remain high in spite of the government’s demand curb measures,” Joanne Lee, Manager of Research and Advisory at Colliers International Hong Kong explains. “The market’s downward cycle is yet to be seen, yet higher interest rates are unlikely to create a major disturbance in the Hong Kong property market.”

Today, high construction costs and a strong demand are working to keep property prices high, though the new, private housing supply will continue growing over the next 3-4 years. Property prices will see only a slight improvement unless interest rates increase sharply or Hong Kong undergoes another economic crisis.

During 3Q 2014, a pickup in demand for high-end units was observed, while rents appear to have stabilised. As the global economy continues to recover, luxury residential rents will bottom out this year and start to pick up by 3% in 2015, after experiencing a 19% decline since the price peak in September 2011.

Colliers believes home prices will undergo a moderate downward pressure when the pace of rate increases during an interest rate-hike cycle intensifies.

Industrial Market
In June 2014, the Hong Kong Science and Technology Parks Corporation (HKSTP) announced that operators were not allowed to sale their industrial properties in the Industrial Estates located in Tai Po, Tseung Kwan O and Yuen Long in the secondary market.

“Induced by the sudden halt in the HKSTP Industrial Estates secondary sales market, the sustained low interest rate environment as well as the limited options in the leasing market, a group of end-users has turned to the sales market to look for suitable premises to satisfy their property needs,” says Arthur Yim, Manager of Research and Advisory at Colliers International Hong Kong.

Apart from end-users, private investors with strong liquidity positions continued to snap up en bloc industrial properties with the view of potential gains from redeveloping or converting the properties for other uses. Colliers anticipates potential gains from redeveloping or converting industrial buildings for other uses will continue to attract investors looking for investment opportunities in the en bloc sales market.

Despite local retail sales performance being weak, whilst total exports grew at a moderated pace in the first 8 months of 2014, there was no abate in demand for industrial premises. Ramp access warehouse remained virtually fully occupied during the review period. Colliers anticipates the sustained demand/supply imbalance will support warehouse rent to increase 2-3% in 2015.

Retail Market
Recent market indicators have raised concerns for some international retail brand in Hong Kong, as the Occupy Central movement, the slowdown in visitor spending and retail sales hit. With more vacant stock available and the lower rental affordability of mid-tier brands than luxury brands, overall rental is predicted to fall 6% in 2015.

As with the last quarter, the slowdown in Hong Kong’s retail sales market reflects the impact of structural changes in the spending patterns of mainland Chinese visitors with the current trend of shopping for more basic goods, instead of luxury goods.

Luxury sales have already been hurt by China’s political reforms on anti-corruption rules. The growing political tension and uncertainties will further drag down sales figures in the midst of the already slowing expansion of China’s economy and weaker private domestic consumption. As a result, retail rental rates in the traditional top four shopping locations decreased by 0.8% QoQ in 3Q 2014, a year-to-date decline of 3.1%. But on the brighter side, shoppers and tourists will instead shop in non-core retail districts.

Colliers observed that mid-tier brands have outperformed luxury brands in pressing ahead with their expansion plans. Some fast fashion brands and cosmetics retailers from South Korea and Japan are actively expanding their footprints in Hong Kong. The mid-tier brands are expected to benefit from several optimistic market factors such as sophisticated consumers who are looking for more midpriced or affordable luxury products.

The retail sector has reached its peak prices, where yield is hovering at record low levels – 2.5%. Looking ahead, the ultra-low interest rate situation is predicted to come to an end in the second half of next year and prospective buyers are inclined to be more conservative in pricing.