27 April 2015

According to Colliers International Hong Kong Property Research and Forecast Report 1Q 2015, office leasing activities on Hong Kong Island have improved, with some occupiers opting for expansion, for instance the banking and finance sector. In the residential sector, prices for both luxury and mass market homes continued to break new records in spite of hefty levies. The retail sector is under pressure from the mainland’s austerity and anti-corruption campaign. The structural changes in spending patterns put international luxury brands at a significant disadvantage. Amid slowdown in retail sales and external trade growth, the growth in demand from warehouse occupiers has moderated.

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

Leasing on Hong Kong Island improved in 1Q 2015, with a wide range of occupiers opting for expansion, especially the banking and finance sector. Overall Grade A office rents increased 1.4% quarter-on-quarter (QoQ) to HK$64.7 per sq ft per month in 1Q 2015. Rents in Central/Admiralty rose 1.2% QoQ to HK$93.4. Island East experienced a 1.7% QoQ increase to HK$45.8. Kowloon East rose 1.1% QoQ to HK$35.4 per sq ft per month.

Colliers forecasts that Central and Admiralty will outperform other districts, with anticipated growth of 7% in 2015. Rental growth in Kowloon East will lag behind other districts due to new supply coming on line in the next few years. Overall Grade A office rent is expected to increase by 3.6% in 2015.

Luxury property prices witnessed moderate growth of 2% last year and edged up another 3% in 1Q 2015. Rents for high-end residential properties in Hong Kong experienced an uptick and rose 4.3% quarter-on-quarter in 1Q 2015. Flats with monthly rents under HK$60,000 were the most active.

The prospective property buyers in the market are financially strong. Tougher borrowing measures imposed from Day One have effectively removed weak home buyers, and stress tests have already factored in a potential hike in interest rates. This latest round of stricter lending rules and the potential of the first interest-rate increase in years during the second half of this year certainly sour the mood among the buying public but essentially pose little threat to the fundamentals of local housing market.

Colliers foresees rents rising 7%, faster than the 3% increase in prices. So yields should edge up 10 basis points in 2015.

The growth in demand from warehouse occupiers has moderated. Nevertheless, due to the limited stock available for lease, warehouse rents remain resilient in 1Q 2015, edged up by 1% quarter-on-quarter.

The demand for industrial premises from occupiers will be underpinned by logistics operators continuing their trend of consolidating operations under one roof in a prime location, to improve their operational efficiency. Despite the anticipated slowing growth of the two major drivers of the industrial market – external trade and retail sales – the prevailing supply shortage in the warehouse sector will continue to support warehouse rents. Industrial rents are set to grow by another 4% in 2015, matching growth of 4% last year, while industrial-property prices will remain high but stable, increasing by less than 2% in 2015.

The three-month moving average of total retail sales fell 2.7% year-on-year in February 2015, in contrast to the 6.5% year-on year growth recorded in February 2014. According to Colliers’ research, retail rents in the traditional top-four shopping locations decreased by 3.5% quarter-on-quarter in 1Q 2015, following a decline of 2.5% in 4Q 2014, and a full year decline of 5.5% in 2014.

Hong Kong’s retail sector is under pressure from the mainland’s austerity and anti-corruption campaign, which has dented luxury spending. There is also increased competition from Europe, South Korea and Japan, which are attracting more and more Chinese tourists. The structural changes in spending patterns put international luxury brands at a significant disadvantage. Some international luxury brands will scale back their store-opening programme as a result of less-exuberant consumption from mainland visitors.

Colliers predicts another 9% slip in the rents of street-level shops in 2015, with more vacant shops becoming available since mid-tier brands can only justify cheaper rents compared to luxury brands.