Uncertainties such as the US-China trade disputes and rising interest rates have started to affect investment decisions across all four markets. Meanwhile, rising prices and rents are set to slow down as business and investment sentiment begins to weaken, and Chinese companies, who have been a major reason behind the market’s inactivity, react to a slowing Chinese economy.
The overall Grade-A office market stayed firm in Q3 with vacancy falling to 3.9% – the lowest in 27 months, and 1.4 million sq ft of net take-up – the highest since Q3 2015. Overall Grade A office rents hit an all-time high of HKD78.4 (USD10.1) per sq ft, up 1.1% QOQ in a very tight market, which might represent a near-term market peak. In 2019, rental growth looks set to slow due to loss of the momentum from mainland companies, a weak stock market, and rising interest rates; also in 2019, landlords should be willing to negotiate on rents and offer better lease flexibility, we expect Grade-A office prices to moderate with yields stabilising. Investors should rethink if they want to invest in core Grade-A office units for the short term.
In August, for the first time since March 2016, Hong Kong residential prices declined, additionally, buying sentiment was impacted by the declining stock market and rising interest rates. Also for the first time since March 2006, HSBC raised its main lending rate, the so-called best lending rate or prime rate. Because of the solid economy and a strong labour market, combined with low credit risks in the financial market, we expect only a mild adjustment of prices – down 3.3% in 2019. With real interest rates turning positive in 2019, buyers should carefully estimate their affordability when purchasing. On the other hand, developers should not set prices to aggressively, as demand could be fickle in this macro-economic uncertainty.
More AI-driven concept stores with self-check out technologies are emerging in the local retail scene, showcasing Hong Kong’s potential for a smart retail future. So far in 2018, a robust economy coupled with strong inbound tourism have led to a healthy retail sales growth, despite the retail market experiencing a slowdown in September. New transportation infrastructure projects should further fuel visitor arrivals in the long term, because of that, and combined with the year-end peak season, we project retail sales to grow 8-10% in 2018. Tenants, especially healthcare and beauty product retailers, should capitalise on the launch of the Express Rail Link and open shops on retail high-streets in Tsim Sha Tsui.
Hong Kong’s external trade momentum remained firm despite the escalating US-China trade conflict. Given the limited industrial supply and low vacancy, industrial rents continue to increase. Meanwhile, investors are focused on redevelopment potential, such as data centres or commercial buildings, which are driving investment transactions. Further details about the revitalisation scheme should be released during the remainder of 2018 and early 2019. Investors should consider the potential in converting industrial buildings for non-industrial use. We expect the positive impact from the revitalisation scheme in the industrial market to outweigh any impact from the trade war.