Hong Kong, 17 November 2015
– Hong Kong’s property market is bracing itself for the impact of the US interest rate hike. “We are expecting a steady rate hike of a total accumulated 100 base point (bps) rise during 2016. While the real interest rates will edge from negative to zero, property prices will see a drop in Q2 next year,” said Simon Lo, executive director, Asia research and advisory.
Speaking at a press conference today, Nigel Smith, managing director, Hong Kong, said: “We see Q2 as the critical turning point for the property market in Hong Kong. Investment prices are expected to fall up to 24%, with retail leading the pack, followed by residential at -15%, industrial -14% and office -5%. Yields on HK Island are expected to rise as rents in Central / Admiralty continue to increase. Elsewhere signs are not so positive with softening office rents in Kowloon and increasing discounts offered for ground floor retail units.”
2015 has seen a marked decline in transaction volume and values due to predominantly negative market sentiment. The respective falls of 37% and 29% from 442 deals worth HKD91.1 billion in 2014 to 279 deals worth HKD64.4 billion in the first ten months of 2015 were the second biggest since 2008’s dramatic 44% drop. While two substantial transactions have recently been concluded, these have been in the making for a long time and are not expected to turn the market positive in the near term. “From a strata-titled offices perspective, there will be a continued rise of demand driven by end users; a trend that should continue well into 2016,” Antonio Wu, deputy managing director, Hong Kong, said.
With the supply of prime quality offices standing at zero, vacancy rates across Hong Kong Island remained incredibly low. “Despite ongoing economic uncertainty, demand for top quality rental premises in Central continues to be active. This is especially true among Mainland Chinese banks wishing to set up operations on Hong Kong Island,” Wendy Lau, executive director of Hong Kong office services, explained. This trend is expected to continue in 2016.
Kowloon is a different story, however with diminishing demand and tenants opting to renew for shorter lease terms – typically one or two-years – compared with 2013 and 2014. As a result of the lackluster demand, rents in Kowloon have levelled out during the last 12 months. “Looking ahead to 2016, with an increase in supply of both new and revitalised properties, it is likely that the market turns in favour of tenants, who will be able to secure terms last seen in 2008-9. The resultant over-supply will lead to a rise in vacancy rates from 2.9% to 5-6%, driving more relocations,” Patrick Mak, senior director of Kowloon office services, forecasted.
While over-the-counter sales of daily necessities remain reassuringly solid for retailers, most luxury stores’ sales are stagnant and heading downwards. High street rental prices are expected to decline by 10% in 2016 as upmarket retailers hold out for signs of a turn around. In their desire to retain clients in what looks set to be an increasingly competitive market, landlords are now starting to offer tenants very competitive terms for lease renewals.
While Hong Kong’s residential property prices remain the world’s third highest, 2015 has been a year of weak market sentiment. This has not only appreciably lowered sales transaction volumes, but also widened the expectation gap between buyers and sellers. “With banks cutting home valuations and developers aggressively offering mortgages of up to 90%, many buyers are running the risk of falling into negative equity. That said, the likelihood of a dramatic fall off following the present all-time high sales price levels is unlikely, as we only anticipate a 15% drop in 2016 (compared with December 1998 at 42.5%). We expect monthly transaction levels for 2016 to hold steady at the 4,000 to 5,000 mark,” said Joanne Lee, senior manager, research and advisory.
Luxury residential rents increased by 10% in 2015, the strongest growth since 2008, driven by the high occupancy. Due to the weakening business sentiment, multinational companies will remain cautious in hiring and the finance industry will likely be much more conservative with their housing allowances.
With 2015 closing out with a noticeable slowdown in export activities and retail sales, it has been no surprise that demand for warehouse space has tapered off significantly. With an increase in warehouse supply, rents will soften by 4%.
Strata industrial prices are also expected to decline by up to 14% as the compressed yield gaps of the last few years in this section are slowly relaxed. “The halting of industrial revitalisation applications in March 2016 will contribute to a rising of potential industrial yields by up to 70 bps. This figure represents an increase of roughly 0.7% from 2.9% in 2015 to 3.6% in the coming year. Such a rise is appreciably faster than for properties in the office sector,” Wayal Chiu, senior director, industrial services, said.