Report highlights

Office – Decentralisation has gained stronger momentum as occupiers consolidate operations from multiple locations

Chinese companies have taken up more offices in Central, pushing Grade A office rents up further. The core Central/Admiralty district increased 0.2% QOQ, the same as in Q1. Overall net absorption improved in Q2 to 243,362 sq ft with strong demand in non-core areas. We expect rent in Hong Kong Island to increase 2.1 % and Kowloon to fall 4.3% in H2. Regarding supply, we expect a total of 3.8 million sq ft to be completed in 2017. Decentralisation became more mature over Q2. For example, the insurance company AXA further consolidated its operations into Wong Chuk Hang, while various foreign banks relocated operations from Central to Causeway Bay. Given the strong competition across Hong Kong Island, co-working operators have been taking advantages of rental premium and large floor plate of the office buildings in Kowloon East.

Industrial – Continuous demand for warehouses with rent up 5% in 2017

The imposition of the 15% ad valorem stamp duty on residential purchases has continued to shift new investment into the industrial sector. Total transactions of industrial properties worth HKD30 million or above were maintained at a high level at HKD 4.1 billion (USD 0.52 billion), thanks to the four en-bloc transactions in Q2. Given a positive trading environment and the recovery of retail sales in Q2, there is a continuous demand for warehouses. The only major supply this year is China Merchants Group’s new warehouse which is located in Tsing Yi and is considered as a popular choice for consolidation and relocation for large occupiers. The leasing market remains favourable and we expect warehouse rent to increase by 5% in 2017 while industrial rent is set to stay firm beyond 2017 amid limited availability.

Residential – Expecting home prices to rise at a modest pace in H2

Despite US interest rate increases and the latest round of cooling measures imposed by the government, the Hong Kong residential market has regained its momentum with the value of total residential transactions rising 43% in Q2 over Q1. Overall home prices increased 3.7% QOQ and overall luxury rents increased 0.7% QOQ with Southside and Mid-levels the most active areas. With supply set to increase gradually, we expect home prices to grow at a slower rate in H2 than in H1. We estimate 10% price growth for 2017 as a whole, and expect negative real interest rates to persist in Hong Kong until late 2018, supporting prices.

Retail – Growth in retail sales with visitor numbers rebounding

The retail market shows signs of recovery, with visitor numbers rebounding and the combined value of total retail sales in April and May increasing by 0.3% YOY. However, the electronic goods and photographic equipment segment continued its downturn, with sales down 16.2% YOY in April and May combined. Mid-tier brands are increasingly replacing luxury labels in high-street locations. Despite this new uptake of high-street retail shops, vacancy of large shops in prime locations persists. We expect high-street rents to stay under pressure for H2 and estimate a further decline of 5% by the year-end. However, the market bottom appears in sight, and we expect conditions to improve from 2018.