21 January 2015

According to Colliers International Hong Kong Property Research and Forecast Report 4Q 2014, while Hong Kong’s office, residential and industrial are set to stably pick up due to the limited supply in the market and the improved market sentiment, structural changes in the retail market is impacting the performance in the retail sector.

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

Due to the lackluster demand from multinational companies, all major Grade A office sub-markets experienced a slower absorption rate in 4Q 2014, with the exception of Wanchai/ Causeway Bay. Net take-up in the overall market amounted to 167,500 sq ft in 4Q 2014, a drop of 52% QoQ. Growth was mainly led by Tsim Sha Tsui and Kowloon East.

Hong Kong will continue to see limited take-up due to smaller Grade A office space requirements. However, low vacancies and the limited supply of office space will continue to make life challenging for occupiers.

For 2015, office leasing activities are set to improve but Colliers is cautiously optimistic about rental growth, with all sub-districts on Hong Kong Island to experience a single digit rental growth of 4-5%.

The office sales market will remain active in 2015, with buyers competing for value-added properties. Factoring in the risk of an interest rate hike, most prospective buyers will continue to seek higher opportunistic returns through refurbishments and the repositioning of tenants.

Market sentiment remained positive with developers continuing to launch new projects with attractive pricing and other incentives including subsidies to cover the extra stamp duty. Since much of the pent up demand has been absorbed throughout the year, sales activity experienced a slowdown in 4Q 2014.

“When negative real interest rate environment persist, the market will not see strong selling by homeowners due to the reluctance to sell flats with deep price cuts,” Joanne Lee, Manager of Research and Advisory at Colliers International Hong Kong explains. “The lack of available stock for sale in the secondary market will result in stronger primary sales in 2015.”

Following the economy’s recovery, rents for luxury residential properties also experienced an uptick and rose 3.0% QoQ in 4Q 2014. As the global economy continues to recover and some companies start to resume their expansion plans, luxury residential rents have bottomed out in 2014 and will start to pick up by 5% in 2015.

Local investors were the major buyers of en bloc industrial properties in 4Q 2014, with the view of potential gains from converting the premises to other uses. The potential gains from redeveloping or converting industrial buildings to other uses will continue to attract investors looking for investment opportunities in the en bloc sales market.

Limited options available in the leasing market and the sustained low interest rate environment have resulted in a group of end-users shifting to the sales market and acquiring suitable premises for owner-occupation.

The tight supply situation will continue in the near term despite the completion of a new logistics warehouse development at TYTL 180 in Tsing Y. “We anticipate the end-users will continue to enter the sales market in view of limited options available in leasing market and sustained rental growth,” says Arthur Yim, Manager of Research and Advisory at Colliers International Hong Kong.

Slowing growth in tourist arrivals, weaker retail sales growth, a shift in the spending patterns of visitors from the mainland and the continual burden of expensive rental costs in street shops have all had a knock on effect on the retail market. Stores located in Admiralty, Mong Kok and Central saw sales contract due to the Occupy Central movement but this was offset by positive growth in other branches.

Retailers remain conservative in the face of moderate sales performance and less exuberant consumption from mainland visitors, with watch and jewellery businesses notably cutting back on expansion plans.

Expansions are concentrated in mid-tier brands, such as fashion retailers and cosmetics retailers from South Korea and Japan. The mid-tier brands are expected to benefit from several optimistic market factors such as sophisticated consumers who are looking for more mid-priced or affordable luxury products.

Investors will continue to expand their search for opportunities in decentralised locations. Factoring in the risk of an interest rate hike, most prospective buyers are inclined to be more conservative in pricing and are seeking higher opportunistic returns through refurbishments and the repositioning of tenants.